NATIONALRESEARCHUNIVERSITY – THE HIGHER SCHOOL OF ECONOMICS
St.-Petersburg branch
Faculty of economics
Department of financial markets and financial management
STRUCTURED DERIVATIVES
Syllabus of the Course
Developed by Evgeni Dorofeev, Ass.Professor, Cand. of Economics
St.Petersburg, 2011
The course description
Derivative instruments and structured corporate debt assets have already become ones of the most popular ways of raising outside corporate financing. Focus aims of the course lay in fields of definite understanding habits, ways and limitations of financing corporate project or asset via issuing derivative instruments, risk distribution among the deal agents, and legal and ethical items of the procedure. Discipline serves both as a practical note for derivatives valuation and trading habits and as a pre-requisite for the major Corporate Finance course on behalf of a material dealing market asset valuationin certain cases.
Most common types of market derivatives are taken into account in the course:
Forwards and futures – as instruments providing definite forward projection of final profit if not cash flows. Exchange trading habits and certain issues such as offset dealing or private defaults form the focus of the paragraph;
(Market) optionsare taken for those most popular speculative instruments with extra high market leverage. Students are given the basic options valuation methods but asked for a detailed trading methods comparison of options versus futures (homework essays with required case calculations);
Certain types of structured bonds– as Russia’s popular marketable instruments normally employed by low-median size corporations;
Swaps – as common corporate financing hedge instruments (forex, rate swaps, etc.);
Structured mortgage securities – as the world’s most common way of avoiding corporate bank capital requirements on disperse credit assets, and the most complicated one in a legal sense;
CDSs – for making student familiar with the most recent derivative market assets.
These issues make the subject of the course.
SYLLABUS OF THE COURSE
STRUCTURED DERIVATIVES
Course description
Course title: / Structured derivativesProgramme: / Master programme, 1st year
Course status: / optional
Instructors: / Evgeni Dorofeev, Ass.Professor, Cand. of Sc. (Economics)
Duration: / 1-2 modules
Course weight: / 5 ECTS
Hours volume: / 64 class hours (lectures – 32 hours, seminars – 32 hours)
Assessment: / Testing, case analysis, homeworkprojecton inventing reasonable trading mechanism for certain derivative instrument
The course is one of the optional courses for the students of the Master program “Financial management”.
The course is aimed at the better understanding of companies’ motives to use structured financial instruments and to hedge with derivatives, as well as investors’ motives to enter the deals.
Course objectives
to make students familiar with the most popular structured instruments and derivative assets;
to give them basics of exchange trading ways and habits, say, using variation margins and deriving gains and losses from market valuation;
to learn using derivatives for hedging corporate asset and liability positions;
to make students understand private and common risks and favors of using derivatives for hedgers, agent groups or business sector, or economy in general.
It is supposed that the students after learning the course would acquire the following competencies:
The knowledge ofbasic principles of valuation of derivative assets both in final position and in daily trades.
The ability to construct adequate hedge instrument or structured corporate asset for a definite reason financing requirement.
The skills to understand risks and opportunities or employing complicated instruments versus ‘plain vanilla’ ones.
Course pre-requisites
General Stock markets andbasic Financial management courses, together with financial media data knowledge and abilities to employ.
Course structure
Course is composed with lectures, tutorials, case studies, group work. It also requires a great deal of work the students should fulfill at home.
Course assessment
The course assessment consists of three parts:
Students’ individual and group work at seminars and tutorials in the form of case analysis, problems solving etc.;
Homework case calculation;
Essay home writing solving the problem to propose some derivative instrument trading mechanism;
Written test combined of several open-answer case studies.
Total amount that a student may earn is 100 points. The final score is the sum of accumulated points for a student common activity at the seminars and set-off of them:
- Class work weights 15 points;
- Essay and homework calculation weight 20 points each;
- Final test weights 45 points.
Distribution of hours
Parts of the course / Class work / Homework / TotalLectures / Tutorials / Total class work
- Aims and Goals of Using Derivatives. Trading procedures
- Risks while Using Derivatives
- Types of Derivatives: Forwards and Futures
- Types of Derivatives: European Options, American Options
Essay Presentations and Protections / 0 / 2 / 2 / 4 / 6
- Types of Derivatives: Swaps
- Types of Derivatives: Callables, Putables, and Offer-Built-In Bonds
- Types of Derivatives: Floaters, Warranted Bonds and Convertibles
- Types of Derivatives: Mortgage Bonds
- Types of Derivatives: CDSs
Final test (written) / 0 / 4 / 4 / 4 / 8
Total volume of hours / 20 / 20 / 40 / 22 / 62
Course Content
Lecture 1.Risks while Using Derivatives (2 hours)
General overview of most useful derivatives and using them in hedging mechanisms. Trading market derivatives. Variation margin and warranty deposit notations, offset trades, margined and non-margined instruments. Default cases
Lecture 2.Risks while Using Derivatives (2 hours)
Derivative risk interpreting and assessment: contract risk, legal risk, on-balance/off-balance asset risk, ‘management overlook’ risk. Liquidity risk, timely devaluation risk, early payment and re-investment risk. Operational risk.
Lecture 3.Types of Derivatives: Forwards and Futures(4 hours)
Forward gains and losses. Futures and hedge procedures.Non-definite forwards (NDFs) on credit rates and forex rates.
Single price model, Pure Expectation Hypothesis (PEH), Local Expectation Hypothesis (LEH), cash flow discounting. Forward/future rate valuation.
Lecture 4.Types of Derivatives: European Options, American Options(2 hours; strongly requires the students’ familiarity with basic option behavior mechanisms)
General non-arbitrage valuation mechanism. Put-call option parity.
Binary and Black-Scholes valuation procedures (home reading).
Lecture 5.Types of Derivatives: Swaps(3 hours)
Interest rate swaps (IRS). Structuring IRS. Hedging positions via IRS and Forex rate swaps (FRS).
Other swap types.
Lecture 6.Types of Derivatives: Callables, Putables, and Offer-Built-In Bonds (2 hours)
Lecture 7.Types of Derivatives: Floaters, Warranted Bonds and Convertibles (2 hours)
Types of bonds specifics, issuers’ and investors’ preferences given definite bonds peculiarities. Corporate financing via special types of bonds (home reading).
General overview of various types of bond valuations, given their cash payments known.
Lecture 8.Types of Derivatives: Mortgage Bonds (2 hours)
Structuring mortgage bonds and originators’ interest. Risks while using mortgage securities and their distribution. True and fake risks diversifying.
Lecture 9.Types of Derivatives: CDSs (1 hour)
General overview of such instruments as CDSs. Their usage in valuation of corporate and government credit risks.
Major risks, legal and operational, while using CDSs. CDS issuers’ default consequences.
Tutorial materials correspond with the lectures content. Sometimes, home reading is treated as indispensible part of studying process.