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FNCE30007 Derivative Securities SUBJECT GUIDE

Semester 1 2020

Prepared by Dr Jonathan Dark Subject Coordinator [email protected]

Department of Finance

Faculty of Business and Economics

Subject Outline Introduction Welcome to FNCE30007 Derivative Securities. This subject focuses on the application and valuation of derivative securities, such as forwards, futures, and options. The emphasis will be on arbitrage relations, valuation, and hedging. 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, hedging, American options and dividends, limitations of the binomial and Black-Scholes Models, pricing via monte carlo, Value at Risk: individual assets and portfolios. Subject Overview and 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 securities; Calculate option prices using Black-Scholes, the binomial model and monte carlo simulation; Explain how derivative securities can be used in hedging; Reflect on the theoretical limitations of key derivatives pricing models and on practical difficulties that arise in their implementation.

Learning Outcomes Learning Outcomes 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: https://handbook.unimelb.edu.au/2020/subjects/fnce30007

Eligibility and Requirements To view the eligibility and requirements, including prerequisites, corequisites, recommended background knowledge and core participation requirements for this subject, please see the University Handbook: https://handbook.unimelb.edu.au/subjects/fnce30007/eligibility-and-requirements

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Academic Staff Contact Details Please see the subject LMS site for full contact details of the teaching staff in this subject. Subject Coordinator Contact Details Name: Dr Jonathan Dark Email: [email protected] Phone: 8344 6866 Consultation Hours: Monday 12.30-2.30pm 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. Note that you must first activate your University email address before you can send or receive emails at that address. You can activate your email account at this link: http://accounts.unimelb.edu.au/. While academic staff endeavor to address queries received via email, it is more appropriate to resolve substantive questions during lectures and tutorials and during normal consultation hours. With this in mind, we encourage students to attend all lectures and tutorials and to familiarise themselves with the consultation hours offered by the lecturers and tutors in this subject.

Lectures / Seminars Lecture Times Stream 1: Monday

10-12pm

PAR-Old-Arts-122 (Public lecture – PLT)

Stream 2: Friday

1-3pm

The Spot – B01 Copland Theatre

Lecture Participation Requirements You are expected to attend all lectures and your enrolled tutorial class each week.

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Lecture Schedule Week

Date Commencing

Topic

Required Reading

Required Reading

Hull – 8th ed

Hull – 7th ed

1

Mar 2/6

Futures

Chapter 2

Chapter 2

2

Mar 9/13

Futures hedging

Chapter 3

Chapter 3

3

Mar 16/20

Futures pricing

Chapter 5

Chapter 5

4

Mar 23/27

Option properties

Chapter 10

Chapter 10

5

Mar 30/Apr 3

Binomial I

Chapter 12, 18.1

Chapter 12, 18.1

6

Apr 6/7

Binomial II

Chapter 12, 18.1

Chapter 12, 18.1

7

Apr 20/24

BSM

Chapter 13.1 to 13.7, 13.9, 19.1 to 19.3

Chapter 13.1 to 13.7, 13.9, 19.1 to 19.3

8

Apr 27/May 1

Mid sem test

9

May 4/8

Dividends

Chapter 13.10, 15.1, 15.3, 15.4, 18.3

Chapter 13.10, 15.1, 15.3, 15.4, 18.3

10

May 11/15

Delta hedging

Chapter 17

Chapter 17

11

May 18/22

Simulation

-

-

12

May 25/29

Value at Risk

Chapter 20.1, 20.3, 20.4

Chapter 20.1, 20.3, 20.4

Please note that there will be no lecture on Good Friday (April 10). A replacement lecture will be held on Tuesday April 7th. Further details will be provided in due course. Lecture Slides

Lecture slides will be placed on the LMS page for this subject prior to each lecture. Using Lecture Capture Audio and video recordings of lectures delivered in this subject will be made available for review following each lecture. These recordings allow you to revise lectures during the semester, or to review them in preparation for the end of semester exam. You can access recorded lectures by clicking on the Lecture Recordings (or similar) menu item on the LMS page for this subject. Please note that recordings are not a substitute for attendance; rather they are designed for revision. On rare occasions the capture system can fail to record the lecture due to 4

technical reasons. In such cases, the recording will not be made available. In lecture theatres with multiple screens only one screen will be captured, any information projected onto the other screen will not be recorded. The University has recently moved to a new Lecture Capture platform with additional features. Please review the Lecture Capture Student Guides page for more information: https://lms.unimelb.edu.au/support/guides/students/lecture-capture-student-guide

Tutorials Tutorial / Workshop Times Tutorials commence in week 2. There will be no tutorial held for the materials covered in week 12 (Value at Risk).Solutions for the Value at Risk tutorial will be made available on the LMS at the end of semester. Tutorials on April 10 (Good Friday) will not be held. Affected students are permitted to attend other tutorials in that week. Tutorial Schedule Week

Topic

1

No tutorial

2

Futures

3

Futures hedging

4

Futures pricing

5

Option properties

6

Binomial I

7

Binomial II

8

No tutorial - Mid semester test

9

BSM

10

Dividends

11

Delta hedging

12

Simulation

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Tutorial Participation Requirements You are required to attempt and hopefully complete the tutorial questions prior to tutorial attendance. You are only permitted to attend the tutorial that you are enrolled in. Private Tutoring Services Faculty has become increasingly concerned about the existence of a number of private tutoring services operating in Melbourne that heavily target University of Melbourne students enrolled in FBE subjects. Students are urged to show caution and exercise their judgement if they are considering using any of these services, and to please take note of the following: Any claim by any of these businesses that they have a “special” or “collaborative” or “partnership” style relationship with the University or Faculty is false and misleading. Any claim by a private tutoring service that they are in possession of, or can supply you with, forthcoming University exam or assignment questions or “insider” or “exclusive” information is also false and misleading. The University has no relationship whatsoever with any of these services and takes these claims very seriously as they threaten to damage the University’s reputation and undermine its independence. It is also not appropriate for students to provide course materials (including University curricula, reading materials, exam and assignment questions and answers) to operators of these businesses for the purposes of allowing them to conduct commercial tutoring activities. Doing so may amount to misconduct and will be taken seriously. Those materials contain intellectual property owned or controlled by the University. We encourage you to bring to the attention of Faculty staff any behaviour or activity that is not aligned with University expectations or policy as outlined above. 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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LMS Discussion Board The Discussion Board for this subject can be accessed via the LMS subject page and allows you to post messages and read messages at any time. All students are free to communicate with each other using the Discussion Board by posting, reading, and replying to messages. The discussion forum is organised into threads (conversations within a topic). Messages are posted by starting a new thread or replying to an existing posting. To access the Discussion Board, click on the Discussion Board located in the navigation menu of the LMS page for this subject. Always be polite when asking questions or posting replies. Impolite language will not be tolerated. The lecturer reserves the right to ban students who use inappropriate/impolite language from using the Discussion Board. Note that the Discussion Board is different to the Online Tutor in that only your lecturer or the designated online tutor can respond to questions. If you have a question that you want to ask your lecturer or tutor, please use the Online Tutor rather than the Discussion Board.

Assessment Assessment Overview Your assessment for this subject comprises the following: Assessment Task

Individual or Group

Due

Weighting

Mid semester test

Individual

April 27 (Stream 1)

25%

May 1 (Stream 2) Final exam

Individual

Examination period

75%

Assessment Details Mid semester test The mid-semester test will be held on April 27(Stream 1) and May 1 (Stream 2) during the normal lecture times and will cover material from lectures 1 to 5 inclusive. Final exam 3 hour end of semester exam. Successful completion of this subject requires a pass (50%) in the final exam.

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Subject Resources Prescribed References John C Hull, Fundamentals of Futures and Options Markets, 8th edition, 2010, Pearson Education Inc. Alternatively, you may use the earlier 6th or 7th edition

Academic Integrity Academic Honesty The University maintains high academic standards in its courses and subjects and expects students to conduct themselves in a manner which is fair, honest and consistent with the principles of academic integrity, particularly when undertaking assessment and research. http://academicintegrity.unimelb.edu.au/

University Services Timetable MyTimetable is a class timetabling system that creates individual timetables for students based on submitted class preferences, ensuring everyone has an equitable opportunity of getting their preferred class timetable. You will use this system to create your class timetable prior to each study period. By following a preference-based model, students who have other commitments, such as employment or carer responsibilities, or who are returning or living overseas during the timetabling period, aren’t disadvantaged by their limited availability. When allocating class timetables, MyTimetable also takes into consideration factors such as class size limits and potential clashes to ensure all students are equally accommodated. Further information is available on the web at https://students.unimelb.edu.au/admin/class-timetable Stop 1: Connecting Students and Services Stop 1 is here to provide you with a range of support services throughout your university degree, from help with enrolment, administration and wellbeing to advice on building your skills and experiences. https://students.unimelb.edu.au/stop1 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. Visit their website via http://services.unimelb.edu.au/academicskills.

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Service Finder The University of Melbourne offers one of the most comprehensive student support networks in Australia. Use this site to locate a wide range of services http://services.unimelb.edu.au/finder Student Counselling Students attend counselling to talk about personal, emotional, or mental health issues which might be affecting their study and life. The University’s Counselling and Psychological Services (CAPS) provides free, confidential, short-term professional counselling to currently enrolled students and staff. https://services.unimelb.edu.au/counsel/individual Student Equity and Disability Support Student Equity and Disability Support provides services for students who need ongoing support with their studies. They understand that adjustments to learning and assessment are sometimes required to allow all students to reach their full potential. Learn more about the services provided, how to find support and how to register for assistance. http://services.unimelb.edu.au/student-equity University of Melbourne Library Services As well as holding an extensive collection of books, ebooks, digital media and periodicals, library staff provide research guidance and support for students. http://library.unimelb.edu.au/ These Business and Economics Library Guides have been designed specifically for Faculty of Business and Economics staff and students. http://unimelb.libguides.com/sb.php?subject_id=80310

Policy 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. Assessment and Results Policy The University’s assessment policy provides a framework for the design, delivery and implementation of assessment of students in award and non-award courses and subjects. Assessment is designed to contribute to high quality learning by students, and to allow for quality assurance and the maintenance of high academic standards. https://policy.unimelb.edu.au/MPF1326

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Exam Policy The University requires that you are available for the entire examination period. Please see the University's Principal Dates via http://www.unimelb.edu.au/dates#2018 for the 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 Speci al 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. Plagiarism and Collusion Plagiarism (failure to cite your sources correctly and completely) and collusion (unauthorised collaboration with another person to prepare an assessment task) are considered academic misconduct and attract severe penalties. More information is available on the University’s Academic Integrity website via http://go.unimelb.edu.au/rha6. 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, visit http://students.unimelb.edu.au/admin/special.

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