The course introduces students to one of the most important and most technically challenging areas in finance: derivative securities. Derivative securities include options, futures, forward contracts and swaps among other securities. This course examines corporate risk management techniques and how derivatives can be used to manage risk. This course will also cover institutional characteristics of derivatives exchanges, OTC markets and market clearing mechanisms. Finally, we will examine the pricing of derivatives and their use to build trading strategies and structured products. The goal of the course is to provide students with a complete overview of the main derivatives contracts, describing valuation issues and potential uses.
The course requires a basic knowledge of futures, forwards, options and swaps. Present value notion and calculations is required. The first class will be dedicated to a review of these topics
In-class sessions during which cases and simulations will be analyzed. Part of the course will be taught by a visiting Professor.
Course grading will be based on a final written test.
Final exam may include both theoretical questions and practical exercises. Students are required to develop autonomy in tackling new problems
During the final written exam (which is a closed-book exam) standard calculators are necessary, It is not allowed to keep mobile phones, iPads or similar devices, even in offline mode,
Basic Pre-requisites
How to use Forward and Future contracts. Pricing of forward and future contracts. Calculation of the market value of forwards. Hedging strategies with Forwards and Futures. Trading strategies with futures:
Use of Forward rate agreement to hedge interest rate risk. FRA rates and arbitrage relations. Pricing and valuation.
How to use Swaps contracts. Pricing and valuation of interest rate swaps..
Options valuation models: binomial and Black-Scholes. Extensions to different underlyings: exchange rates, futures, stock index futures. Sensitivity coefficients (greeks) and their use in directional and volatility trading strategies. Options trading simulation. Volatility smile and skew. Volatility term structure: causes, impact on pricing, trading implications. Introduction to variance swaps.
Description of the main exotic options contracts. Use of exotic options for hedging and risk management.. Equity linked structured securities: index linked, asket linked, reverse convertibles.
Students taking the 6 CFU exam are not required to attend the visiting professor's part of the course.
