| Week |
Subject |
Related Preparation |
| 1) |
• Introduce the markets for futures, forward, and options contracts
• Explain the activities of hedgers, speculators, and arbitrageurs
• Discuss the growing importance of derivatives
• Discuss issues such as the relationship between a futures price and the corresponding spot price, the desirability of options being exercised early, why most options sell for more than their intrinsic value
• Discuss how arbitrage arguments tie the futures price of gold to its spot price and why the futures price of a consumption commodity such as oil is not tied to its spot price in the same way
• What is a derivative?
• Why Derivatives Are Important?
• How Derivatives are Used?
• Exchange-traded markets
• Over-the counter markets
• Forward Price
• Profit from a Long and Short Forward Position
• Futures Contracts
• Arbitrage opportunities
• Options
• Types of Traders
• Ethical issues about derivative products
|
|
| 2) |
• Cover the details of how futures markets work
• Examine issues such as specification of contracts, the operation of margin accounts, the organization of exchanges, the regulation of markets, the way in which quotes are made, and the treatment of futures transactions for accounting purposes.
• Compare futures contracts with forward contracts
• Explain the difference between the payoffs realized from futures contracts and forward contracts.
• Background of futures markets
• Specification of a futures contract
• Convergence of futures price to spot price
• The operation of margins
• OTC markets
• Market quotes
• Types of traders and types of orders
|
Read chapter 1 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class.
|
| 3) |
• Explain a number of general issues associated with the way hedges are set up
• Discuss various ways in which a company can take a positon in futures contracts to offset an exposure to the price of an asset
• Discuss a number of theoretical and practical reasons why companies do not hedge
• Define basis risk
• Compute optimal hedge ratio
• Explain the features of stock index futures
• Basic principles of hedging strategies using futures
• Arguments for and against hedging
• Basis risk
• Cross hedging
• Stock index futures
|
Read chapter 2 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 4) |
• Discuss fundamental issues concerned with the way interest rates are measured and analyzed
• Explain the compounding frequency used to define an interest rate and the meaning of continuously compounded interest rates, which are widely used in the analysis of derivatives
• Define zero rates, par yields and yield curves
• Discuss bond pricing
• Describe forward rates and forward rate agreements
• Recall different theories of term structure of interest rates
• Explain the use of duration and convexity measures to determine the sensitivity of bond prices to interest rate changes.
• Types of interest rates
• Measuring interest rates
• Zero rates
• Bond pricing
• Determining Treasury zero rates
• Forward rates
• Forward rate agreements
• Duration
• Theories of term structure of interest rates
|
Read chapter 3 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 5) |
• Examine how forward prices and futures prices are related to the spot price of the underlying asset.
• Derive some important general results about the relationship between forward prices and the spot prices
• Examine the relationship between forward prices and the spot prices for contracts on stock indices, foreign exchange and commodities.
• Investment asset versus consumption asset
• Short selling
• Assumption and notations in determining futures and forward prices
• Forward price for an investment asset
• Known income
• Known yield
• Valuing forward contracts
• Are forward prices and futures prices equal?
• Futures prices of stock indices
• Forward and futures contracts on currencies
• Futures on commodities
• The cost of carry
• Delivery options
• Futures prices and the expected future spot price
|
Read chapter 4 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 6) |
• Explain popular Treasury bond and Eurodollar futures contracts
• Show how interest rate futures contract when used in conjunction with the duration measure, can be used to hedge a company’s exposure to interest rate movements.
• Interest rate futures
• Treasury bond futures
• Eurodollar futures
• Duration based hedging strategies using futures
• Hedging portfolios of assets and liabilities
|
Read chapter 5 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class.
|
| 7) |
• Define swap agreements
• Describe mechanics of interest rate swap
• Explain typical uses of an interest rate swap
• Discuss valuation of interest rate and currency swap
• Identify comparative advantage argument
• Introduction to Swaps
• Mechanics of interest rate swaps
• Day count issues
• The comparative advantage argument
• The nature of swap rates
• Determining the LIBOR/swap zero rates
• Valuation of currency swaps
• Credit risk
|
Read chapter 5 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class.
|
| 8) |
Midterm Exam
|
Read chapter 7 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class.
|
| 9) |
• Explain how options markets are organized, what terminology is used, how the contracts are traded and how margin requirements are set.
• List types of option contracts
• Identify positons in option contracts
• Define specifications of stock options
• Discuss profit pattern from an investment in a single option
• Types of options
• Option positions
• Underlying assets
• Specification of stock options
• Trading
• Commissions
• Margins
• Warrants, employee stock options, and convertibles
• Over-the-counter markets
|
None |
| 10) |
• Discuss factors affecting option prices
• Examine a number of arbitrage arguments to explore the relationships between European option prices, American option prices and the underlying stock price
• Explain put-call parity
• Factors affecting option prices
• Assumptions and notation
• Upper and lower bounds for option prices
• Put-call parity
• Calls on a non-dividend paying stock
• Puts on a non-dividend paying stock
• Effect of dividends
|
Read chapter 10 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class.
|
| 11) |
• Discuss what can be achieved when an option is traded in conjunction with other assets
• Examine the properties of portfolios consisting of positions in (i) an option and a zero-coupon bond (ii) an option and the asset underlying the option and (iii) two or more options on the same underlying asset
• Trading strategies involving options
• Trading an option and the underlying asset
• Spreads
• Combinations
|
Read chapter 11 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 12) |
• Define binomial tree which is a very popular technique for pricing an option
• Explain nature of the no-arbitrage arguments that are used for valuing options
• Formulate the binomial tree numerical procedure that is widely used for valuing American options and other derivatives.
• Introduce risk-neutral valuation
• A one-step binomial model and a no-arbitrage argument
• Risk-neutral valuation
• Two-step binomial trees
• American options
• Delta
• The binomial tree formulas
|
Read chapter 12 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class..
|
| 13) |
• Describe Merton’s approach to deriving the Black-Scholes-Merton model.
• Explain how volatility can be either estimated from historical data or implied from option prices using the model.
• Explain how the Black-Scholes-Merton model can be extended to deal with European call and put options on dividend-paying stocks.
• Lognormal property of stock prices
• The distribution of the rate of return
• The expected return
• Volatility
• The idea underlying the Black-Scholes-Merton differential equation
• Derivation of the Black-Scholes-Merton differential equation
• Risk-neutral valuation
• Black-Scholes-Merton pricing formulas
• Cumulative normal distribution function
|
Read chapter 14 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 14) |
• Discuss options on stock indices and currencies in detail.
• Explains how options on stock indices and currencies work and review some of the ways they can be used
• Options on stock indices
• Currency options
• Options on stock paying known dividend yields
• Valuation of European stock index options
• Valuation of European currency options
• American options
|
Read chapter 1 from Options, Futures, and Other Derivatives, 9/E, John C Hull, Pearson and be prepared to discuss in class. |
| 15) |
• Evaluate students via final exam
• Final Exam
|
Review all the chapters covered in the semester for the final exam. |
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