Financial Derivatives (N1559)
Financial Derivatives
Module N1559
Module details for 2023/24.
15 credits
FHEQ Level 6
Module Outline
This module introduces the markets, trading and valuation of common derivative products, such as forwards/futures, swaps and options. Both equity and interest rate markets are covered. Practical applications of derivatives for hedging or investment purposes are discussed, including their risk-return profiles, advantages and limitations. Fundamental concepts of no arbitrage and risk neutral pricing are introducing, culminatin in the well-known Black Scholes formula for option pricing at the end of the module. An outline of lectures is shown below:
1. Introduction to Derivative Markets: Forwards, Futures, Swaps and Options: Payoffs, market participants, benefits and dangers
2. Equity and FX Futures and Forwards: markets, applications, margining, and hedging
3. Pricing of Forwards and Futures: no arbitrage, replication, basis risk,
4. Forward Rates and Forward Rate Agreements: term structure of interest rates
5. Interest Rate Futures and Swaps: day-count conventions, duration-based hedging
6. Option markets and strategies: put-call parity, moneyness, European vs American options, price bounds, structuring, payoff decomposition
7. Pricing options: The Binomial tree model
8. Exotic options: digital options, barrier options, Asian options
9. Stochastic Models for Derivatives: geometric Brownian motions, Wiener processes
10. Black-Scholes Model: from binomial to Black Scholes, pricing formulae for European options, options on Futures
11. Greeks: risk management with options, hedging
Module learning outcomes
Describe the function of derivatives in financial markets and discuss their advantages and limitations.
Identify, compare and evaluate the main derivative products commonly traded in equity, foreign exchange and interest rate markets, as well as some of the more exotic instruments.
Explain the concept of no arbitrage and recognize the central role it places in derivatives pricing.
Implement the binomial tree and Black-Scholes models to find the no arbitrage price of a range of derivative securities. Critically examine and debate the key assumptions and limitations of the approaches.
| Type | Timing | Weighting |
|---|---|---|
| Unseen Examination | Semester 2 Assessment | 70.00% |
| Coursework | 30.00% | |
| Coursework components. Weighted as shown below. | ||
| Test | T2 Week 8 (1 hour) | 100.00% |
Timing
Submission deadlines may vary for different types of assignment/groups of students.
Weighting
Coursework components (if listed) total 100% of the overall coursework weighting value.
| Term | Method | Duration | Week pattern |
|---|---|---|---|
| Spring Semester | Lecture | 2 hours | 11111111111 |
| Spring Semester | Seminar | 1 hour | 11111111111 |
How to read the week pattern
The numbers indicate the weeks of the term and how many events take place each week.
Mr Diego P. Guisande
Assess convenor
/profiles/643498
Prof Andreas Kaeck
Assess convenor
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