Module overview
The module studies quantitative techniques for pricing the main financial derivatives available for trading in financial markets. This is done under assumptions imposing absence of arbitrage opportunities in financial markets. The module focuses on futures and forwards on bonds and stocks, swap contracts and stock options. The module also introduces students to more advanced techniques for pricing derivatives such as binomial trees and Black-Scholes model.
Aims and Objectives
Learning Outcomes
Subject Specific Intellectual and Research Skills
Having successfully completed this module you will be able to:
- select which securities to use for given hedging and/or speculative objectives
- design swap contracts exploiting the concept of comparative advantage
- price a range of derivative instruments depending on market conditions
- construct investment portfolios with options
Transferable and Generic Skills
Having successfully completed this module you will be able to:
- Use quantitative reasoning to determine valuations
- communicate quantitative reasoning in written form
Knowledge and Understanding
Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:
- the fundamental features of a range of key financial derivative instruments
- the concept of no-arbitrage in financial markets
- pricing models for key financial derivative instruments
Syllabus
This course covers forward contracts, futures contracts, swaps, and options.
The main topics to be covered are
- Valuation of futures and forward contracts
- Valuation of swap contracts
- Stock options: valuation, hedging and trading strategies
- Valuation of stock options using binomial trees
- The Black-Scholes model and the Greek derivatives
Learning and Teaching
Teaching and learning methods
The module consists of lectures and masterclasses. Lectures are used for explaining the theory of financial derivatives and classes are used for solving problems related to the theory..
| Type | Hours |
|---|---|
| Teaching | 24 |
| Independent Study | 126 |
| Total study time | 150 |
Resources & Reading list
Textbooks
(2014). The Economics of Financial Markets. Cambridge: Cambridge University Press.
Hull, J. C. (2012). Options, Futures, and Other Derivatives. New York: Prentice Hall.
Assessment
Assessment strategy
Assessment in this module is through group coursework (worth 15% of the final mark), an online test (15%) and an end of semester take-home assignment (70%). This is accompanied by continuous formative assessment in form of problem sets. Assessment is the same for internal repeat. Assessment for referral and external repeat is through final assignment only.
Summative
This is how we’ll formally assess what you have learned in this module.
| Method | Percentage contribution |
|---|---|
| Assignment | 70% |
| Online test | 15% |
| Group Coursework | 15% |
Referral
This is how we’ll assess you if you don’t meet the criteria to pass this module.
| Method | Percentage contribution |
|---|---|
| Assignment | 100% |
Repeat
An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.
| Method | Percentage contribution |
|---|---|
| Assignment | 100% |
Repeat Information
Repeat type: Internal & External