| CODE | BKF4051 | |||||||||
| TITLE | Derivatives Markets | |||||||||
| UM LEVEL | 04 - Years 4, 5 in Modular UG or PG Cert Course | |||||||||
| MQF LEVEL | 6 | |||||||||
| ECTS CREDITS | 4 | |||||||||
| DEPARTMENT | Banking, Finance and Investments | |||||||||
| DESCRIPTION | Objectives The study-unit objective is to help students attain a basic understanding of financial derivatives: forwards, futures, swaps and options. It uses an integrative graphical ‘building block’ approach that integrates the topics covered into one unified framework. An attempt is made to simplify the mathematical content and to emphasize the understanding of the underlying economic concepts. Students are expected to read the study-unit material before coming to the lecture and are encouraged to participate in the lecture with questions and comments. Students are encouraged to complete the work sheet problems which are given each week for every topic covered during the study-unit. Course Content 1. INTRODUCTION - The new financial environment. - Financial price risk. SSW: 1 S: 1 2. FINANCIAL RISK - The risk profile. - Tools for managing financial risk. - Forward, futures, swap and option contracts. SSW: 2 H: 1 - Growth of Derivatives. - Uses of Derivatives. - The Dealers. - Regulation, Accounting and Taxation. SSW: 3 - Risk Management and the value of the Firm. SSW: 4 - Measuring Financial Price Risk. SSW: 5 3. FORWARD CONTRACTS - Structure of a Forward contract. - Foreign exchange forward contract. - Interest Rate Parity. - Forward Rate Agreement (FRA). SSW: 6 - Using forwards to manage: (a) Foreign Exchange Risk. (b) Interest Rate Risk SSW: 7 4. FUTURES - The Futures Contract. - Institutional features to reduce Credit Risk. - Liquidity. - Futures prices. - Cost of Carry. - Expected future spot prices. - Basis. SSW: 8 H: 2, 3, 4 S: 8 - Using futures to manage: (a) An underlying exposure. Basis Risk (b) Rolling and hedging. SSW: 9 S: 9, 10, 11 5. SWAPS - Evolution of swap contract. - Growth of the swap market. SSW: 10 H: 5 - Pricing of swaps. - Valuing a swap. SSW: 10 H: 5 - Using Swaps to: (a) Reduce funding costs (b) Increase Capacity (c) Hedge the firm (d) Create synthetic instruments SSW: 11 6. OPTIONS - The graphics of options. - Option valuation. - Put-call parity. - The Binomial option-pricing model. SSW: 12 H: 6, 7, 9 S: 2, 3, 4 - The black-scholes option pricing model. - Extensions of the black-scholes model. - Numerical models. SSW: 13 H: 10, 11 S: 5 - Using options to hedge: (a) Interest rate risk (b) Foreign exchange rate risk (c) Commodity price risk SSW: 14 H: 8 7. Using the Instruments - Assembling the building blocks to produce “new” instruments. - Redesigning of Financial Instruments. - Swap options. - Compound options. - Options on stock Indexes. - Currency options. SSW: 15, 16 H: 12, 13 S: 13 8. REVIEW AND FINAL TEST Main Text/s and any supplementary readings - Charles W. Smithson, Clifford W. Smith, Jr., and D. Sykes Wilford, Managing Financial Risk, 1995, Irwin (SSW). - John Hull, Options, Futures and other Derivatives, seventh edition, 2008, Prentice Hall (H). Supplementary Texts - Robert A. Strong, Speculative Market, second edition, 1994, Harper Collins (S). - Country D. Smith, Option Strategies, second edition, 1996, Wiley. Other texts - Lawrence Galitz, Financial Engineering: Tools and Techniques to Manage Financial Risk, revised edition, 1995 Pitman Publishing (G). - Peter Ritchken, Derivative Markets: Theory, Strategy and Application, 1996, Harper Collins (R). - Robert T. Daigler, Financial Futures and Options Market, 1994, Harpers Collins (D). Advanced Texts - John C. Cox and Mark Rubinstein, Options Market, 1985, Prentice Hall, (CR). - Paul Wilmott, Derivatives: The Theory and Practice of Financial Engineering, 1998, Wiley. - E. Briys, M. Bellalah, H.M. Mai and F. de Varenne, Options, Futures and Exotic Derivatives, 1998, Wiley. Mathematical Texts - Paul Wilmott, Sam Harrison and Jeff Dewynne, The Mathematics of Financial Derivatives, A Student Introduction, 1995, Cambrige. - Satyajit Das (ed.), Risk Management and Financial Derivatives: A Guide to the Mathematics, 1998, Macmillan. |
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| STUDY-UNIT TYPE | Lecture and Tutorial | |||||||||
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| LECTURER/S | Joseph Falzon |
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The University makes every effort to ensure that the published Courses Plans, Programmes of Study and Study-Unit information are complete and up-to-date at the time of publication. The University reserves the right to make changes in case errors are detected after publication.
The availability of optional units may be subject to timetabling constraints. Units not attracting a sufficient number of registrations may be withdrawn without notice. It should be noted that all the information in the description above applies to study-units available during the academic year 2023/4. It may be subject to change in subsequent years. |
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