Introduction to financial derivatives

This course provides you with an overview of the main characteristics of financial instruments and trading practice, with an emphasis on quantitative aspects of options, futures, and other derivatives.

On successful completion of this module you will be expected to understand the differences between the main derivatives contracts and their use for hedging, understand the principles of valuation based on the absence of arbitrage, and understand simple probabilistic methods involved in the valuation of derivatives contracts.

Likely topics: 

• overview of financial markets: function of financial markets; classification of financial markets; market efficiency; trading mechanisms; intermediaries; brief history; major world's markets; indexes.

• interest rates and bonds pricing: compounding frequencies; spot and forward rates; term structure of interest rates; cash flow evaluation; bond markets; bonds evaluation.

• forward and futures: generalities; forward price on a security that provides no income; forward price on a security that provides a known cash flow; forward price on a security that provides a known dividend yield; forward contract on currencies; forward contract on commodities; stock index futures; spot and forward price; forward and futures prices; hedging with futures: basis risk and optimal hedging ratio; hedging with stock index futures.

• swaps: forward rate agreements; mechanics of swaps contracts and comparative advantage argument; valuation: relation of swaps to bonds and to fras; interest rate swaps; currency swaps.

• options: generalities; trading strategies involving options: spread and combinations; upper and lower bounds for option prices (no dividends); put‐call parity (no dividend): european, american;

• upper and lower bounds for option prices (with dividends); put‐call parity (with dividend): european, american; early exercise; binomial model for option pricing; exotic options.