BU.232.710.XX –Derivatives– Instructor Name – Page 1 of 7

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Derivatives

2 Credits
BU.232.710.XX
[NOTE:Each section must have a separate syllabus.]
[DayTime/ex: Monday, 6pm-9pm]
[StartEnd Dates / ex: 3/24/15-5/12/15]
[Semester / ex: Fall 2016]
[Location / ex: Washington, DC]

Instructor

[Full Name]

Contact Information

[Email Address]

[Phone Number,(###)###-#### (Optional)]

Office Hours

[Please specify the day and time of the 2 hours that will be dedicated to office hours each week. For evening classes, faculty may wish to hold their office hours by phone or email. While faculty are permitted to state “and by appointment,” office hours should not be held exclusively by appointment.]

Required Text(s)Learning Materials

  • Hull, J. C., Options, Futures, and Other Derivatives, 9th Edition, Pearson.

This is a standard textbook in derivatives and covers a wide range of topics. It is an important book to have in your personal library.

Note: The 7th and the 8th editions of the book also work very well. The 9th edition contains some information about the new regulations for over-the-counter derivatives and a few other very small (for our purposes) modifications.

  • Lecture notes will be posted on Blackboard (usually 2 days) before class.

RecommendedText(s)

A suggested, non-mandatory, additional reading:

  • Marthinsen, J. (2010), Risk Takers: Uses and Abuses of Financial Derivatives,2nd edition,Pearson.

This is a bedside-table, entertaining book which does not contain any formulae. It is a nice reading which helps understanding how, and when, derivatives work.

Course Description

This course offers a rich overview of forwards, futures, swaps and options. The course will cover both the actual working of derivatives and the analytical tools needed to effectively understand derivatives. Skills are developed in pricing analysis, use of pricing models, trading, and hedging strategies. The strategies are developed to match specific economic goals, such as portfolio risk reduction.

Prerequisite(s)

BU.231.620 OR BU.910.611

Course Overview

There has been a dramatic growth in markets for financial derivatives in recent years. In today’s business world, managers can, and sometimes must, use financial derivatives such as futures, options, and swaps to hedge risk. The purpose of this course is to provide students with the necessary skills to value and employ futures, options, and other related financial instruments. This course will cover both the actual working of derivatives and the analytical tools needed to effectively understand derivatives. The course balances theory and applications.

It is divided into three main parts:

Part 1:

a)Forwards and Futures

b)Pricing Forwards and Futures

c)Hedging Using Forwards and Futures

Part 2:

a)Swaps

b)Pricing Swaps

c)Transforming Assets and Liabilities Using Swaps

Part 3:

a)Options

b)Pricing Options

c)Trading Strategies Using Options

Part 4 (time permitting):

a)How not to use derivatives: Metallgesellshaft and Barings crises.

Trading derivatives can be dangerous. The collapses of Metallgesellshaft and Barings represent excellent examples of the risks involved in trading derivatives.

b)The role of derivatives in the present economy.

Finance and Social Responsibility

The effectiveness and perceived integrity of finance have been tested in recent years. Along with preventable excesses and regrettable distortions, financial innovation has, however, always been an effective means for society to achieve its goals, from insurance to consumption to saving. The power of financial innovation as a generator of inclusive prosperity and widespread well-being can (and should be) reclaimed. In this context, optimization of shareholder’s value, for instance, may not be the only metric along which financial success is measured and should be placed, along with other traditional finance metrics, in the broader context of its contribution to society. To this extent, Carey encourages technical, non-ideological, exchanges of ideas leading to a better understanding of the broader role of finance as a force for shared prosperity. The reading (to be announced) provides an initial opportunity for technical discussions of these issues as they relate to the topics covered in “Derivatives.”

Learning Objectives

To view the complete list of Carey Business School’s general learning goals and objectives, visit the Carey website.

Derivatives are assets whose value depends on the value of other assets. Derivatives are complex instruments and, to fully understand them and employ them successfully, it is important to take into account multiple factors. This is in line with Carey Learning Goal 1.1.

Quantitative techniques ought to be balanced with qualitative analysis. The course will discuss real business cases in which the sole use of quantitative techniques has, for instance, lead to bankruptcy-type situations. This is in line with Carey Learning Goal 1.2.

Finally, the nature and structure of derivatives may lend itself to fraudulent behavior. The course will briefly analyze instances in which derivatives may lead, and have lead, to unethical behavior. This is in line with Carey Learning Goals 3.1 and 3.2.

By the end of this course, students will be able to:

  1. Price futures and forwards.
  2. Hedge risk exposure using forwards and futures.
  3. Use swaps for transforming assets and liabilities.
  4. Trade options.
  5. Price options.
  6. Make investment and hedging decisions by combining quantitative and qualitative techniques.

Attendance
Participants are expected to attend all scheduled class sessions. Failure to attend class will result in an inability to achieve the objectives of the course. Full attendance and active participation are required for you to succeed in this course.

Assignments

Assignment / Learning Objectives / Weight
Homework / 1–6 / 21%
Stocktrak game / 1–6 / 5%
Quizzes / 1–6 / 14%
Final Exam / 1–6 / 60%
Total / 100%

Homework (21%): There will be 3 homework assignments, each worth 7%. The assignments have a very important pedagogical role. They are designed to check your understanding of the material covered in class. You can work on these in groups (maximum 3 people) but you do not have to do so, if you so choose.

Stocktrak exercise (5%):Performance on theStocktrak ( trading game will be worth 5% of the final grade. Using derivatives (along with stocks and bonds) will be an important aspect of the game. Information on the trading game will be provided on the first day of class.

Important: In order not to give any advantage to anyone, the instructor will not provide any consulting advice on (1) the functioning of the Stocktrak website or (2) the actual strategies to implement. You should therefore view Stocktrak as you would view your personal online stock broker (choose your own strategies, place your bets, and contact Stocktrak support system directly for questions related to the website). Once more, no questions related to Stocktrak will be addressed. However, you should always feel free to get in touch with questions about the course’s subject matter.

Quizzes (14%):The quizzes will be short (maximum 15minutes long). They will be closed-book. Each quiz is worth 7% of the final grade. Both quizzes are mandatory and cannot be substituted for a higher weight on the final exam or the assignments.

Final Exam (60%):The (cumulative) final exam will be between 2 and 3 hourslong. It will be closed-book.

Grading

Effective Fall 2017: The grade of A is reserved for those who demonstrate extraordinarily excellent performance as determined by the instructor. The grade of A- is awarded only for excellent performance. The grades of B+, B, and B- are awarded for good performance. The grades of C+, C, and C- are awarded for adequate but substandard performance.The grades of D+, D, and D- are not awarded at the graduate level (undergraduate only). The grade of F indicates the student’s failure to satisfactorily complete the course work.

Please note that for Core and Foundation courses, a maximum of 25% of students may be awarded an A or A-; the grade point average of the class should not exceed 3.3. For Elective courses, a maximum of 35% of students may be awarded an A or A-; the grade point average of the class should not exceed 3.4. (For classes with 15 students or fewer, the class GPA cap is waived.)

Tentative Course Calendar**The instructors reserve the right to alter course content and/or adjust the pace to accommodate class progress. Students are responsible for keeping up with all adjustments to the course calendar.

Topics with two stars (**) may be covered with online material due to limited class time.

Week / Topic / Reading / Goal / HW
1 / Introduction to the Course, Forwards and Futures / Hull, chs 1, 2 5 / 1.1 To introduce students to the world of derivatives.
1.2 To understand the functioning of forwards and futures contracts.
2 / 2.1 Pricing Forwards and Futures
2.2 Forward/Futures Hedging Strategies / 2.1 Hull, ch 5
2.2 Hull, ch 3 / 2.1 To understand the pricing of forwards and futures contracts. Students will learn how to use the no-arbitrage condition to price forwards and futures.
2.2 To understand hedging using forwards and futures contracts. / Homework 1 posted on Blackboard
3 / Forward/Futures Hedging Strategies / 3.1 Hull, ch 3
3.2 Hull, ch 4 / 3.1 To understand hedging using forwards and futures contracts (continued).
3.2 Review of fixed income pricing. / Quiz 1
4 / Interest RateForwards and Futures/Swaps / 4.1 Hull, chs 4 & 6
4.2 Hull, ch 7 / 4.1 Interest rateforwards and futures have a different structure than commodity or equity forwards and futures. Students will learn how interest rate forwards and futures (with an emphasis on Forward Rate Agreements and Eurodollar Futures) work.
4.2 To study swap contracts on interest rates and currencies, why they are useful,and how they can be structured in practice. / Homework 1 due
Homework 2 posted on Blackboard
5 / 5.1 Options and Option Markets
5.2 Option Trading Strategies (**) / 5.1 Hull, chs 10 & 11
5.2 Hull, ch 12 / 5.1 To understand option markets. Students will learn how to compute upper and lower bounds of option prices and the relation between put and call option prices (put-call parity). The no-arbitrage condition will be applied to derive all results.
5.2 What are the most important trading strategies with options? Why are these trading strategies important and what do they really achieve? Now is the time to learn it.
6 / Binomial Trees / Hull, ch 13 / To understand how to price options (and other financial derivatives) using trees. / Homework 2 due
Homework 3 posted on Blackboard
Quiz 2
7 / The Black-Scholes-Merton Option Pricing Model and an Introduction to the Greeks (**) / Hull, chs 14, 15 & 19 / The Black-Scholes-Merton pricing model was developed in 1974 but it is still the baseline model for pricing options. We derive it and discuss its pricing implications. / Homework 3 due
8 / Final Exam

BU.232.710.XX –Derivatives– Instructor Name – Page 1 of 7

Carey Business School

Policies and General Information

Blackboard Site

A Blackboard course site is set up for this course. Each student is expected to check the site throughout the semester as Blackboard will be the primary venue for outside classroom communications between the instructors and the students. Students can access the course site at Support for Blackboard is available at 1-866-669-6138.

Course Evaluation

As a research and learning community, the Carey Business School is committed to continuous improvement. The faculty strongly encourages students to provide complete and honest feedback for this course. Please take this activity seriously; we depend on your feedback to help us improve. Information on how to complete the evaluation will be provided toward the end of the course.

Disability Support Services

All students with disabilities who require accommodations for this course should contact Disability Support Services at their earliest convenience to discuss their specific needs. If you have a documented disability, you must be registered with Disability Support Services ( or 410-234-9243) to receive accommodations. For more information, please visit the Disability Support Services webpage.

Academic Ethics Policy

Carey expects graduates to be innovative business leaders and exemplary global citizens. The Carey community believes that honesty, integrity, and community responsibility are qualities inherent in an exemplary citizen. The objective of the Academic Ethics Policy (AEP) is to create an environment of trust and respect among all members of the Carey academic community and hold Carey students accountable to the highest standards of academic integrity and excellence.

It is the responsibility of every Carey student, faculty member, and staff member to familiarize themselves with the AEP and its procedures. Failure to become acquainted with this information will not excuse any student, faculty, or staff from the responsibility to abide by the AEP. Please contact the Student Services office if you have any questions. For the full policy, please visit the Academic Ethics Policy webpage.

Students are not allowed to use any electronic devices during in-class tests. Calculators will be provided if the instructor requires them for test taking. Students must seek permission from the instructor to leave the classroom during an in-class test. Test scripts must not be removed from the classroom during the test.

Student Conduct Code

The fundamental purpose of the Johns Hopkins University’s regulation of student conduct is to promote and to protect the health, safety, welfare, property, and rights of all members of the University community as well as to promote the orderly operation of the University and to safeguard its property and facilities. As members of the University community, students accept certain responsibilities which support the educational mission and create an environment in which all students are afforded the same opportunity to succeed academically. Please contact the Student Services office if you have any questions. For the full policy, please visit the Student Conduct Code webpage.

Student Success Center

The Student Success Center offers free online and in-person one-on-one and group coaching in writing, presenting, and quantitative courses. The center also offers a variety of workshops, exam study sessions, and instructor-led primer seminars to help prepare students for challenging course content, including statistics and accounting. For more information or to book an appointment, please visit the Student Success Center website.

Other Important Academic Policies and Services

Students are strongly encouraged to consult the Carey Business School’s Student Handbook and Academic Catalog and Student Resources for information regarding the following items:

  • Statement of Diversity and Inclusion
  • Inclement Weather Policy

Copyright Statement

Unless explicitly allowed by the instructor, course materials, class discussions, and examinations are created for and expected to be used by class participants only.The recording and rebroadcasting of such material, by any means, is forbidden. Violations are subject to sanctions under the Honor Code.