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CODE BKF4181

 
TITLE Trading Futures and Options

 
LEVEL 04 - Years 4, 5 in Modular UG or PG Cert Course

 
ECTS CREDITS 4

 
DEPARTMENT Banking and Finance

 
DESCRIPTION Content:

1. Introduction to derivatives instruments and markets

- Evolution and development of derivative products and markets;
- Similarities and differences between derivative products:
    - Forwards and futures;
    - Swaps and options;
    - Vanilla and exotic derivatives.
- Fundamental principles of derivative pricing and valuation;
- Current developments within the global derivative markets:
    - Regulatory developments (Dodd­Frank, EMIR);
    - Developments in pricing and valuation of derivatives;
    - Incorporation of Credit Value Adjustments (CVA) in derivative pricing;
    - Accounting for funding risk in derivatives pricing; the LIBOR – OIS spread.
- An overview of the role of derivatives in financial markets:
    - Hedging ­ Corporate and institutional use of derivatives;
    -Trading and investment applications of derivatives;
    - Arbitrage – Using derivatives to exploit market inefficiencies.

2. The trading, dealing and clearing environment:

- OTC vs. Exchange traded products;
- Recent developments;
- Broking vs. Market making;
- Trade execution;
- Order vs. Quote driven markets;
- Market order types;
- Placing orders in an electronic trading platform;
- Calculating the P & L on a futures contract;
- Understanding the Clearing House guarantee and margining system for exchange traded instrument.

3. Forwards and Futures Markets:

- Distinctions between listed and OTC contracts:
    - Execution, clearing and settlement arrangements for futures and forwards;
    - Physical and cash settlement conventions.
- Arbitrage­free pricing of equity, interest rate and FX forwards and futures;
- Market, counterparty and operational risks in forwards and futures;
- Accounting and tax treatment of forwards and futures;
- Hedging forwards and futures exposures:
    - Static and dynamic replication strategies;
    - Liquidity and funding risks in hedging forwards and futures.
- Corporate and institutional applications of forwards and futures:
    - FX, equity, interest rate and commodity exposure management;
    - Trading strategies and investment applications.

4. Introduction to options:

- What is an option?;
- Option terminology;
- Exercise types;
- Intrinsic vs. Time value;
- Understanding the payoff profiles.

5. Trading and hedging strategies with equity options:

- Understanding how to construct payoff profiles for combinations of options and the underlying;
- Understanding the relationship between puts and call;
- Identifying common directional and volatility trading strategies;
- Hedging with options.

6. Option Risks and Risk Management:

- Understanding option price sensitivities – the ‘Greeks’;
- Delta hedging:
    - The concept of continuous dynamic Delta hedging in pricing models.
- Limitations and assumptions of Delta hedging;
- Understanding higher order option sensitivities – Gamma;
- Gamma and Vega – measures of volatility risk exposure;
- Understanding and actively managing interrelationships between option price sensitivities;
- Active management of portfolio delta, gamma, theta and vega risks;
- Higher order risks and their relationship to smile and skew phenomena:
    -Vega and Volga risks.
- Using option greeks to measure hedge effectiveness and performance attribution analysis;
- Limitations of option ‘Greeks’:
    - Discontinuities in market price behaviour; slippage in hedging;
    - Expiration trading;
    - Stress testing and portfolio scenario analysis; identifying potential future risks.

Reading List:

- Option Volatilty and Pricing: Advanced Trading Strategies and Techniques – Sheldon Natenburg.
- The Encyclopaedia of Trading Strategies – Jeffrey Owen Katz PHD.

 
STUDY-UNIT TYPE Lecture

 
METHOD OF ASSESSMENT
Assessment Component/s Resit Availability Weighting
Project No 40%
Examination (2 Hours) Yes 60%

 
LECTURER/S Michel Said

 
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 study-unit description above applies to the academic year 2017/8, if study-unit is available during this academic year, and may be subject to change in subsequent years.
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