The course provides an understanding of the main derivative financial instruments: futures, swaps and options. It explains the trading mechanisms used on derivative markets, the fundamental principles underlying the pricing of derivative instruments and their use in portfolio management.

Lectures: One 2-hour lecture a week for 10 weeks

Tutorials: One 1-hour tutorial a week for 8 weeks.

Tutorials slots can be selected via MyCampus

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ILO

Reassessments are normally available for all courses, except those which contribute to the Honours classification. For non Honours courses, students are offered reassessment in all or any of the components of assessment if the satisfactory (threshold) grade for the overall course is not achieved at the first attempt. This is normally grade D3 for undergraduate students and grade C3 for postgraduate students. Exceptionally it may not be possible to offer reassessment of some coursework items, in which case the mark achieved at the first attempt will be counted towards the final course grade. Any such exceptions for this course are described below. 

The course provides an understanding of the uses and the valuation of the main derivative financial instruments: futures, swaps and options. It covers the trading mechanisms used on derivative markets and explains the fundamental principles underlying the pricing of derivative instruments and their use in portfolio management. Particular attention is paid to the practicalities of using derivative instruments for risk management purposes. The course also provides an introduction to the working of the foreign exchange market and the instruments traded thereon. Related institutional aspects are introduced where necessary.

By the end of this course students will be able to:

1. Analyse how futures and forwards can be used by hedgers and speculators.

2. Evaluate the price and the value of forward (futures) contracts.

3. Perform valuation of an interest rate swap and a currency swap.

4. Discuss how option payoffs are determined.

5. Discuss the use of a variety of option trading strategies and apply the put-call parity theorem.

6. Evaluate the fair value of an option contract using the binomial option pricing model and the Black-Scholes-Merton option pricing model.

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