Global derivative markets have exhibited spectacular growth in terms of volume of trading and use by both financial and non-financial institutions. Some of the world’s large institutions-Orange County, Baring, Metallgesellschaft, Negara, AIG, and Lehman Brothers have lost billions of dollars in the financial markets. Whilst national and international authorities have agonised over the regulation of derivative markets, it generated tremendous interest on the nature, operation, working mechanism and true significance of derivative products and markets in the financial system and the economy.
Main topics:
• Forwards: No arbitrage principle
• Futures: Marking-to-market, margins call and liquidity
• Swaps: Interest rate risk and measures for risk management
• Options: Arbitrage versus speculation, options trading strategies
• Credit Default Swaps: Selling protection or printing money
• Path Dependent Products
• Exotic Options
• Real-Estate and Subprime Loans: The bubbles that always burst
• Securitization Process and Asset-Backed Securities: Derivatives as weapons from mass destruction?
The module focuses on the principles and characteristics of the main derivative markets, products and instruments, such as Futures, Forward, Options, Swaps, Credit Default Products and Structured Products. It examines the role, significance and working mechanism of various derivatives products, their valuation method and the models underpinning the pricing and hedging of derivative instruments. The module will draw from the rapidly expanding body of academic and professional literature relating to derivatives and their applications in Financial Markets.
Total contact hours: 37
Private study hours: 113
Total study hours: 150
Main assessment methods
Group Technical Report (2000 words) (20%)
Individual Report (2000 words) (20%)
Examination, 2 hour (60%).
Reassessment methods
100% Exam
Hull, John .C. (2011) Options, Futures and Other Derivatives, 8th edn., Prentice Hall.
McDonald , Robert (2005) Derivatives Markets, second edition, Addison Wesley, Boston.
See the library reading list for this module (Canterbury)
The intended subject specific learning outcomes.
On successfully completing the module students will be able to:
- Identify and clearly explain the fundamental concepts of derivatives.
- Apply mathematical skills in pricing derivatives to problems of risk management.
- Develop trading strategies for exploiting arbitrage opportunities.
- Demonstrate knowledge and understanding of the theory of options and futures pricing.
- Analyse various financial instruments in the context of developing portfolios for the purpose of hedging, speculation and arbitrage.
- Assess risk management strategies in terms of relevance for specific corporate applications.
- Demonstrate understanding of and ability to apply models for valuing derivative securities.
The intended generic learning outcomes.
On successfully completing the module students will be able to:
- Analyse, compare, discuss, critically evaluate evidence and hypothesis. To structure, develop and defend complex arguments orally and in writing.
- Plan work, use relevant sources and study independently.
- Work in groups, synthesise debate, respond to different points of view and negotiate outcomes; ability to receive and use criticism and advice.
- Ensure appropriate formats are selected for presentation of work, which includes the acknowledgement and reference of sources.
- Analyse structured and unstructured problems.
- Apply advanced mathematical skills.
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