Subject Guide FNCE30007 2018 PDF

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FNCE 30007 Derivative Securities SUBJECT GUIDE

Semester 2, 2018

Prepared by Federico Nardari

Department of Finance Faculty of Business and Economics

Subject Outline Introduction This subject focuses on the characteristics and valuation of derivative securities, such as forwards, futures and options and on their application to risk management. The emphasis will be on arbitrage relations, valuation, hedging risk and speculating with derivatives. The overall aim of this subject is to provide an understanding of the following topics: Forwards and futures - the mechanics of trading, price determination, hedging strategies; Options payoffs, arbitrage bounds, trading strategies, the binomial model, the Black-Scholes model and its relationship to the binomial, the Greeks and hedging, American options and dividends, limitations of the binomial and Black-Scholes models.

Subject Aims On successful completion of this subject students should be able to: Explain the role of derivatives exchanges and the characteristics of derivative securities; Explain the role of arbitrage as a basis for determining the prices of derivative securities; Explain the mechanics of trading futures contracts, forward contracts and options; Design and manipulate payoff diagrams for various derivative security strategies; Calculate option prices using the BlackScholes and binomial models; Explain how derivative securities can be used in hedging and speculation; Reflect on the theoretical limitations of key derivatives pricing models and on practical difficulties that arise in their implementation.

Learning Outcomes Subject Objectives and Generic Skills To view the subject objectives and the generic skills you will develop through successful completion of this subject, please see the University Handbook at: https://handbook.unimelb.edu.au/view/2018/FNCE30007

Prerequisites Please see the University Handbook https://handbook.unimelb.edu.au/view/2018/FNCE30007

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Academic Staff Contact Details Lecturer Contact Details Your coordinator for FNCE 30007 is Professor Federico Nardari. Professor Nardari’s details are: Email: [email protected] Room: 11.016, Level 11, The Spot Phone: 9035 4133 Consultation Hours: Tuesday, 2:00 pm – 4:00 pm (starting in Week 2)

Head Tutor Contact Details Your Head Tutor for FNCE 30007 is Yudong Zheng. Email: [email protected] Room: Level 12, The Spot

Email Protocol Please note that we are only able to respond to student emails coming from a University email address. Please do not use personal email addresses such as Yahoo, Hotmail or even business email addresses. Emails from non-University email addresses may be filtered by the University’s spam filter, which means that we may not receive your email. All correspondence relating to this subject will only be sent to your University email address.

Lectures Lecture Times One weekly 2-hour lecture on: Tuesday 10:00 am – 12.00pm in the Carrillo Gantner Theatre (Sidney Myer Asia Centre) OR Thursday 4:15 pm – 6:15 pm in the Carrillo Gantner Theatre (Sidney Myer Asia Centre) OR Friday 2:15 pm – 4:15 pm in the Old Engineering A1 Theatre

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Lecture Schedule Lecture

DATE (Stream 1/ Stream 2)

LECTURE TOPIC

Reference to Hull – 8th edition

TUTORIAL TOPIC

1

July 24/ July 26 July 27

Introduction, Futures Markets

Chapters 1 & 2

No tutorial

2

July 31/ August 2 August 3 August 7/ August 9 August 10

Futures hedging

Chapter 3

Futures

Futures Hedging and Pricing

Chapter 3,5

Futures hedging

4

August 14/ August 16 August 17

Futures Pricing, Option properties and markets

Chapter 5, 9,10

Futures hedging/ pricing

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August 21/ August 23 August 24 August 28/ August 30 August 31

Trading Strategies

Chapter 11

Trading Strategies, Binomial Model I

Chapter 11, 12

Futures Pricing, Option properties and markets Option Markets, Trading Strategies

Sept. 4/ Sept. 6 Sept. 7 Sept. 11/ Sept. 13 Sept. 14 Sept 18/ Sept 20 Sept 21 October 2/ October 4 October 5 October 9/ October 11 October 12 October 16/ October 18 October 19

Binomial II BSM I

Chapter 12, 13, 18.1-18.3

Trading Strategies

BSM II

Chapter 13, 15

Binomial Model I

The Greeks and Hedging with Options The Greeks and Hedging with Options Volatility Smiles

Chapter 17

Binomial Model II, BSM I

Chapter 17

BSM II

Chapter 19

The Greeks and Hedging with Options

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Mid Sem Test

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Lecture Slides, Lecture Recording and Class Preparation Lecture slides will be placed on the LMS page for this subject prior to each lecture. The lecture slides are located in the “Lecture Slides” folder under the heading “Documents”. It is strongly recommended that students download and read the slides prior to each lecture. Lecture capture will be available on the LMS for this subject.

Tutorials Tutorial Times One 1-hour weekly tutorial, commencing in Week 2. Time, location and materials for the tutorial sessions can be accessed from the LMS page for this subject under the heading “Tutorials”. Time and location can also be found on the University timetable at https://sws.unimelb.edu.au/2018/. Pit-stop tutorials will also be conducted throughout semester. Queries regarding tutorials should be directed (in the first instance) to either your tutor or a pit-stop tutor.

Online Tutor The Online Tutor allows you to direct questions to your tutor/lecturer via the LMS. The Online Tutor can be accessed 24 hours a day, 7 days a week. Tutors will attempt to answer your question within 24 hours (weekdays only). Your questions and the tutor’s answers can be accessed by all students in the subject, allowing everyone to benefit from the question and answer. Importantly, your identity will not be revealed to other students. Even if you don’t want to ask a question, you can still view existing questions and answers. Note that the Online Tutor is not designed to replace attendance at tutorials, but rather to complement the tutorial process. Also, simple questions that can be answered by referring to the prescribed readings will not usually be answered. You can access the Online Tutor via the Online Tutor link, located in the navigation menu of this subject’s LMS page.

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Assessment One 3-hour “end-of-semester” examination (75%) and a 1-hour “mid-semester” test (25%). The mid-semester test will be held on September 11 (Stream 1), September 13 (Stream 2) or September 14 (Stream 3) and will cover materials from lectures 1 to 6 inclusive. Midsemester test times and locations will be communicated during the term.

Hurdle Requirement In order to pass this subject, you must pass the end of semester examination.

Exam Policy The University requires that you are available for the entire examination period. Please see the University's Principal Dates website for full annual calendar. Supplementary exams will not be provided in cases of absence during the examination period unless the absence is due to serious illness or other serious circumstances and a Special Consideration application is submitted and approved.

Information on Calculators in Examinations Effective from 1 January 2017, the approved calculator for all subjects is the Casio FX82 (any suffix). No equivalent models of calculators will be permitted in exams. You are required to purchase your own calculator and are responsible for ensuring your calculator is in good working order with fresh batteries. You are no longer required to get an "approved" sticker put on your calculator from Stop 1 or your faculty/graduate school. Instead the examination invigilators will conduct spotchecks during examinations to ensure the correct calculators are being used.

Special Consideration As a student, you may experience extraordinary or unusual circumstances, or ongoing circumstances that adversely affect your academic performance. The University has policies in place to support students who are experiencing academic disadvantage. For more information and for applications, see the Special Consideration website.

Alternative Exam Arrangements (AEA) The definition of and eligibility requirements for alternative exam arrangements (AEA) can be found via http://students.unimelb.edu.au/admin/alternate . Mid-semester examinations/tests are organised by the Department of Finance. If you wish to request alternative arrangements, email [email protected] with a copy of your approved Academic Adjustment Plan. 6

Plagiarism and Collusion •

Plagiarism is the presentation by a student of an assignment identified as his or her own work even though it has been copied in whole or in part from another student’s work, or from any other source (eg. published books, web-based materials or periodicals), without due acknowledgement in the text.

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Collusion is the presentation by a student of an assignment as his or her own work when it is, in fact, the result (in whole or in part) of unauthorised collaboration with another person or persons. Both the student presenting the assignment and the student(s) willingly supplying unauthorised material are considered participants in the act of academic misconduct.

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Plagiarism and collusion are considered academic misconduct and attract severe penalties. Penalties can include a mark of zero for the piece of assessment or a fail grade for the subject.

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More information, including practical advice to students, is available on the University’s Academic Honesty and Plagiarism website.

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The Library and Academic Skills also provides excellent resources to help you reference correctly.

Academic Skills Academic Skills offers a range of workshops and resources to help you with study skills including researching, writing and referencing, presentation skills and preparing for exams.

Subject Resources Prescribed References The prescribed text is John C Hull, Fundamentals of Futures and Options Markets, 8th edition, Pearson Education Inc.

Supplementary Materials Additional materials, such as readings, videos, spreadsheets, may be assigned during the term: should that occur, they will be posted on the LMS and instructions to access them will be provided. Supplementary materials are not optional materials.

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