Objectifs

The course aims to introduce Finance students to the theoretical and practical aspects of financial futures, options, and other derivatives. Financial derivatives are one of the most important tools of modern finance and have been trading at enormous volumes (~ 700 USD trillion) in the derivatives markets over the last 40 years. Individuals and institutions participate in these markets to meet a variety of objectives. For example, firms and portfolio managers can use derivatives to hedge particular types of risks, or to change the distribution of the returns on their portfolios for speculative purposes.

During the course we focus on the analytical aspects of derivative products and the practical applications of risk management tools in various contexts. A derivative security is an instrument whose value is derived from the value of one or more underlying assets. We cover several asset classes, including stocks, foreign exchange rates, interest rates, and commodities among others. We discuss a wide range of applications, including the use of derivatives in asset management as well as the 7 USD trillion structured products market and the exotic features of the options embedded in those products.

The course studies various quantitative techniques for pricing financial derivatives under the assumption of no arbitrage opportunities in financial markets and the law of one price. It introduces to students the advanced techniques for pricing derivatives such as binomial trees and Black-Scholes-Merton model as well as it highlights their limitations.

The goal is for you to develop your intuition and skills on pricing and hedging of derivatives as well as understand the principles of how these important instruments and markets work in practice.

At the end of the course, students are expected to:

• have a good understanding of derivative securities,
• master the key features of various derivative instruments,
• be able to price those securities, and
• be able to decide which securities to use for hedging and/or speculative purposes.

Contenus

• Introduction to Derivatives
• No Arbitrage, Forwards and Futures
• Hedging using Derivatives
• Introduction to Options and Option Markets
• Trading Strategies with Options
• Binomial Pricing
• Black-Scholes-Merton (BSM) model and the Greeks
• Delta-hedging, Market-making
• Interest Rate Derivatives
• Volatility
• Valuation of Defaultable Securities
• Derivatives in Credit Markets
• Real Options

Références

• Lecture slides, additional materials, and exercises provided during the course
• R. L. McDonald, Derivatives Markets, Pearson, 3rd International Edition, 2013
• J. Hull, Options, Futures, and Other Derivatives, 8th edition, Prentice Hall, 2011
• S. E. Shreve, Stochastic Calculus for Finance I, The Binomial Asset Pricing Model, Springer, 2004

Pré-requis

Good knowledge of calculus and probability theory is required.

Evaluation

1ère tentative

Examen:

Ecrit 2h00 heures

Documentation:

Autorisée

Calculatrice:

Autorisée

Evaluation:

The overall course grade will be based on midterm and final exam performances (90% in total) as well as assignments (10%)

- 90% 0.6 x Final Exam Grade + 0.4 x Midterm Exam Grade

- 10% Assignments

Rattrapage

Examen:

Ecrit 2h00 heures

Documentation:

Autorisée

Calculatrice:

Autorisée

Evaluation:

The overall course grade will be based on retake final exam performance (90%) and assignments (10%).