FINA 441 Syllabus Spring 2017 PDF

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Course Syllabus UNIVERSITY OF MASSACHUSETTS LOWELL MANNING SCHOOL OF BUSINESS FINA 4410 - 201/202 Introduction to Financial Derivatives (3 credit hours) Spring Term 2017 SYLLABUS Instructor: Office: Phone: E-mail:

Steven Freund Pasteur 316 (978) 934-2818 [email protected]

Class Meetings:

Monday/Wednesday Section 201: 12:30 pm – 1:45 pm Falmouth 205 202: 2:00 pm – 3:15 pm Falmouth 205

Office Hours:

Monday/Wednesday 11:00 am – 12:00 pm (noon) Tuesday 5:30 pm – 6:00 pm I am also available for additional hours per prior arrangement.

Catalog Course Description and Prerequisites: This course is an introduction to financial derivatives. The primary emphases are the valuation and practical application of these instruments for both hedging and speculation. Topics include the characteristics of options, forward contracts, futures, and swaps; arbitrage and the valuation of derivatives; creating value and profit diagrams; and the structure of the derivatives markets. Ethical and economic issues associated with the use of derivatives as reported in the current financial press will also be covered. The course prerequisites are: FINA 301 Financial Management or FINA 321 Investment and Portfolio Analysis Required Textbook and Materials: No specific textbook is required for this course, and all the quizzes and exams are based on the course content posted in Blackboard. Since the material covers the body of knowledge on derivatives as required for the Chartered Financial Analyst (CFA) Level 1 examination, I draw heavily on the curriculum published by the CFA Institute, and in particular, I follow the 2012 edition. Many students like to have additional material to draw on, and in general I agree that one should consult multiple sources for increased understanding. If you would like to obtain a used copy of the CFA program curriculum, look for: CFA Program Curriculum Volume 6: Derivatives and Alternative Investments Level 1 2012 CFA Institute Pearson. FINA 4410 Introduction to Financial Derivatives

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Course Syllabus

The latest publication of the CFA curriculum is the 2016 edition, published jointly with Wiley, but it is most likely available only as a set of all six volumes. You should look for a 2012 single volume paperback as described above if you want to purchase a used copy at a reasonable price. Don Chance, the author of the CFA derivatives readings, is also the author of one of the most popular derivatives textbooks, therefore an alternative textbook would be: Don M. Chance and Robert Brooks, An Introduction to Derivatives and Risk Management Almost any edition of this text would work as a supplementary source to the material covered in this course. Please realize that we will only cover a fraction of the material in this book, but if you have an interest in derivatives, it is a good source of material. There are many other derivatives books I can recommend, so please feel free to get in touch if you want to discuss this topic. For all my finance courses, I always recommend obtaining a business or scientific calculator with power (yx), natural logarithm (LN), and exponential (ex) function. It need not have financial functions unless you are used to using these for time value of money calculation. Course Overview and Objectives: Derivative are contracts in which there is an agreement to transfer ownership of an underlying asset at a time, place, and price specified in the contract. Examples of derivatives include forwards, futures, options (puts and calls) and swaps. Examples of the underlying assets on which derivative contracts are written include stocks (individual as well as indices), interest rate assets such as bonds and Treasury bills, and exchange rates. While an exchange rate is not strictly speaking an “asset,” one could think of the currency behind the exchange rate as the asset. One use of derivatives is that it is an alternative way to take a position (either on the upside or the downside) in risky assets that have a fluctuating future value. Although one can use financial derivatives to speculate, they can also be used to hedge an existing or required position in the underlying asset, and therefore actually decrease overall risk. The main objective of the course is to acquire familiarity with these very popular financial assets, learn about the markets in which they trade, and understand the various strategies to either reduce or increase risk exposure. A second course objective is to introduce the valuation of these instruments, since knowledge of that will increase your overall understanding of finance. Finally, we will discuss government regulations and historic and current events that have shaped and continue to alter the derivatives markets. We will cover derivatives at the same level as required for the Level 1 CFA Program. The CFA Certification is highly respected in industry, and the “body of knowledge” that is required for the exams are similar to what is required by the investment profession. FINA 4410 Introduction to Financial Derivatives

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Course Syllabus Student Requirements and Interaction Guidelines: The material for the course is divided into seven modules. Each module will appear in a separate folder in Blackboard, containing course materials, practice problems, and a quiz. A special folder labeled “Start Here” contains the course syllabus and course schedule. For each module you are required to read the lecture material, work out the practice problems, and take a quiz. We will tentatively schedule three classes for each module. In the initial lectures, we will go over each set of notes, but it is useful if you can read over the notes before coming to class. We will also work out some of the practice problems and after the last class session in the module, answers to these problems will be posted on blackboard. Module Quizzes You must take the quiz before the final quiz date shown in the course calendar. Since the quiz is timed you should only start it after studying all the material, and working out the practice questions under quiz-like conditions. After submission, you will see your quiz grade and you can retake the quiz a second time (questions are similar but not identical), provided that you are still before the final deadline date and time. Ideally, you will make your first attempt at the quiz after you are sufficiently prepared but several days before the deadline to give you time to improve should you find your grade to be low. Only your highest of the two attempts will count for the quiz, and I will also drop your two lowest quiz grades to calculate your quiz average for the final course evaluation. Please read the academic honesty policy below regarding quizzes. Exams Exams are conventional in-class exams. The first two exams are on the modules indicated in the course calendar, and the final exam is cumulative, and covers all seven modules. The date will be during the final exam week as provided by the registrar’s office. There is generally no make-up for missed quizzes and exams and medical emergencies will need to be verified with documentation. Please read the academic honesty policy below regarding exams. Exams are closed book with the exception of a single 8.5 x 11 sheet of handwritten notes that must be handed in with the exam. You may utilize both sides of the page. This single page of notes must be your own work and not a copy of anybody’s notes. It can contain definitions, formulas, diagrams, etc., but should not have worked out examples of problems such as copies of homework solution sets. Course Evaluation (Grading Policy): Quizzes (average of five highest quiz grades) Exam #1 Exam #2 Exam #3 (final – cumulative/comprehensive) Total

FINA 4410 Introduction to Financial Derivatives

20% 25% 25% 30% 100%

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Course Syllabus Final course letter grades correspond to numerical grades (after rounding) as follows: 93 and above: 90 through 92 87 through 89 83 through 86 80 through 82 77 through 79 73 through 76 70 through 72 67 through 69 60 through 66 59 or below

A A– B+ B B– C+ C C– D+ D F

Academic Honesty: Allegations of academic misconduct are handled within the department and college by the Process of Notification and Adjudication described in the Undergraduate Catalog. https://www.uml.edu/Catalog/Undergraduate/Policies/Academic-Policies/AcademicIntegrity.aspx . This policy covers all quizzes as well as the three exams, all of which must reflect your individual effort. They cannot be done by anyone else or as a group project. Any evidence that indicates that you participated in such activity will be subject to severe disciplinary sanctions, applied equally to the source as well as the recipient of any dishonest help. Student Disability Services UMass Lowell is committed to assisting students with documented disabilities by providing reasonable accommodations in all online courses. Students with documented disabilities should contact the Student Disability Services at: https://www.uml.edu/student-services/Disability/default.aspx About Your Instructor: I received a B.S. in Management Engineering from Rensselaer Polytechnic Institute, an M.B.A. from the University of Connecticut, and a Ph.D. in Finance from New York University. My main research work is in option pricing, stock markets, and corporate finance.

FINA 4410 Introduction to Financial Derivatives

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Course Syllabus Course Calendar, Schedule of Exams, and Last Day to Complete the Weekly Quiz

Module 1

Readings in Date Topics 2012 CFA book* 1/18 Review of Risk and Return Measures, 60 1/23 Stocks and Bonds, Time Value of Money; 1/25 Introduction to Derivative Markets 61

Last Date for Quiz** 1/30

2

1/30 Forward Markets and Contracts 2/01 2/06

2/08

3

2/08 Futures Markets and Contracts 62 2/20 2/13 2/15 (No class, Monday, 2/20 –Presidents’ Day but quiz 3 due midnight, followed by class on Tuesday, 2/21) 2/21 Review on Modules 1 through 3 2/22 Exam 1 on Module 1 through 3

4

2/27 Option Markets and Contracts 3/01 3/06

63

3/08

5

3/08 Option Strategies 3/20 3/22

65

3/27

6

3/27 Principles of Option Pricing 3/29 4/03 (Quiz 3 due Tuesday 4/04)

63

4/04

64

4/24

4/05 Review on Modules 4 through 6 4/10 Exam 2 on Modules 4 through 6 7

4/12 Swap Markets and Contracts 4/19 4/21 (Friday, to make up for Patriots’ Day)

4/24 Review on Modules 1 through 7 4/26 Review on Modules 1 through 7 Finals Week as Scheduled: Final Exam on Modules 1 through 7 *

CFA programs for other than 2012 may have different “readings reference numbers”. **Module Quizzes must be taken before 11:59 pm on the dates indicated. FINA 4410 Introduction to Financial Derivatives

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