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25620 Derivative Securities

Warning: The information on this page is indicative. The subject outline for a particular session, location and mode of offering is the authoritative source of all information about the subject for that offering. Required texts, recommended texts and references in particular are likely to change. Students will be provided with a subject outline once they enrol in the subject.

Subject handbook information prior to 2018 is available in the Archives.

UTS: Business: Finance
Credit points: 6 cp

Subject level:

Undergraduate

Result type: Grade and marks

Requisite(s): 25556 The Financial System
These requisites may not apply to students in certain courses.
There are course requisites for this subject. See access conditions.

Recommended studies: algebraic manipulations, basic elements of statistics (mean, variance, covariance and correlation), abstract mathematical concepts, basic principles in finance (the time value of money and risk-adjusted discount rates)

Description

Derivative securities play an important role in current financial markets. This subject provides students with an understanding of the following derivatives securities: forwards, futures, swaps and options traded in both domestic and international markets. Students learn the fundamentals of derivatives pricing (i.e. valuation by arbitrage arguments) and their use for hedging and trading purposes. Students develop technical and analytical skills through applied practice-based problems by assessing and managing financial risk using derivatives, and evaluating positions and trading strategies in futures, forwards, swaps and options contracts. The fundamental knowledge and skills developed in this subject are necessary for a career in finance.

Subject learning objectives (SLOs)

Upon successful completion of this subject students should be able to:
1. explain derivatives pricing and use standard pricing formulae
2. discuss financial risks and how to manage them
3. illustrate the use of derivatives in the management of financial risks and in exploring financial arbitrage
4. analyse and formulate derivative trading positions and strategies for financial trading purposes

Contribution to the development of graduate attributes

This subject contributes to the Bachelor of Business degree by providing students with an understanding and application of derivative financial instruments. Students will develop their critical thinking, analytical and technical skills relevant to making informed decisions regarding the use of derivative securities, for example, using index futures or options to protect the value of an equity portfolio for a firm’s clients. Such skills will be developed through practice-based problems and assessments experienced in lecture and tutorial classes, via an industry sponsored and co-developed assessment task, online self-assessment tools, in-class quiz and final exam. This subject builds upon knowledge developed in corporate finance and investment areas. The knowledge and skills developed in this course are relevant to roles in an investment bank, asset management or treasury role.

This subject contributes to the development of the following UTS Business School graduate attributes:

  • critical thinking
  • creativity and analytical skills
  • business practice oriented skills

This subject specifically introduces the following program learning objectives:

  • PLO 1.1. Critically analyse relevant concepts to understand practice in business and related professions in a global workplace
  • PLO 5.1. Apply technical and professional skills necessary to operate effectively in business and related professions

Teaching and learning strategies

Derivative Securities will be taught using a combination of interactive lecture and tutorial classes supplemented with flipped learning activities. UTSOnline will be used to share information about the subject, to provide in-class and self-study material and to encourage student interaction with staff and other students. The subject outline, lecture slides and additional supplements, tutorial questions and solutions, online quizzes and video content are all available on UTSOnline.

This subject draws from almost all areas of finance and economics. You will therefore need to think more globally rather than locally. Students are cautioned that due to the mathematical nature of the content, this subject is considered to be an intermediate level undergraduate quantitative course. It is assumed that you are comfortable with algebraic manipulations and basic elements of statistics (mean, variance, covariance and correlation) and can deal with technical mathematical concepts. 26134 Business Statistics, 25556 The Financial System, 25622 Quantitative Business Analysis, and 25503 Investment Analysis provide the background knowledge required to handle this content, it is highly recommended that you complete these courses before attempting 25620. It will also be presumed that you understand and can apply in practice the basic principles in finance namely: time value of money and risk-adjusted discount rates concepts.

Pre-class activities: Students are expected to complete the preparatory activities before attending class throughout the semester:

  • along with the lecture notes, students are required to regularly read and reflect upon the recommended textbook readings;
  • for specific topics, additional video content and excel worksheets will be available on UTSOnline to supplement your learning. Such preparation will allow students to enhance their active learning experiences during lectures
  • due to complex nature of tutorial problems, students should ensure that they have attempted the tutorial questions prior to coming to class to promote their active learning experiences and to get the most out of the tutorial class;
  • given the quantitative nature of this course, to assist students with understanding the material in tutorial classes they should complete additional practice recommended problems from the textbook.
  • a pre-quiz (available during the Orientation week) and self-assessment online quizzes for each lecture consisting of ten multiple choice questions are available on UTSOnline. The solutions for all online quizzes will be provided online, students will have the opportunity to re-attempt the self-assessment quizzes for additional practice for the in-class quiz and final exam.

Students are encouraged to engage with each other and staff on UTSOnline to support them with their flipped learning activities and subject content.

During classes: It is expected that you attend and participate in all lectures and tutorials. Lectures have a 120 minute duration and tutorials have a 60 minute duration. It is also expected that you have completed the pre-class activities prior to coming to class.

The assessments are based on the assumption that you attend all classes and are active in the learning process. Whenever you do not attend a lecture or tutorial, or complete the variety of learning activities prior to coming to class you considerably diminish your chances of passing the subject. Regular attendance at lectures and tutorials will enhance student’s active and collaborative learning experiences via: allowing students to keep up to date with the topics covered and fill gaps in their understanding of subject material by having face to face contact with teaching staff, obtain staff/peer feedback, discuss and understand current financial issues and participate in completing practice-based problems.

Other active/collaborative learning activities require students to work together to solve tutorial problems, spreadsheet demonstrations of specific content (e.g., estimating option prices and implied volatility), and a guest lecturer providing students the opportunity to get additional insight of how derivatives are traded in practice and tips for applying for graduate jobs. Selected problems will be discussed to reinforce the ideas of the previous lecture topic during the tutorial portion of each session. The tutorial time is designed to clarify your understanding of the assigned problems and key concepts. You are expected to attempt to solve the tutorial questions prior to the session and bring any issues or challenges to discuss during the tutorial session. The role of staff is to help you understand the subject and its applications. You must, however, do the learning yourself. Merely listening to staff or reading the solutions to lecture, tutorial and textbook problems will not lead to an understanding of the subject, nor will it prepare you for assessment tasks. You must be active in the learning process and this advice is particularly relevant in lectures and tutorials.

Feedback: There are several ways you can obtain feedback on your learning. Tutorial questions, recommended textbook questions, online pre-quiz, weekly online self-assessment quizzes, in-class quiz, an authentic practice-based group assignment, and final exam offer a multitude of ways to demonstrate to yourself and teaching staff your level of understanding of the subject content. The online pre-quiz and weekly online self-assessment quizzes available on UTSOnline, and tutorial and textbook questions provide regular feedback on your understanding of the subject matter.

Students will be provided feedback on their performance in the in-class quiz and authentic practice-based group assignment. Students also can obtain individual feedback on their learning during the weekly consulting hours where students can have face-to-face meetings with the subject lecturer.

Content (topics)

  • Relationship between forward, futures and spot prices
  • Hedging strategies using financial futures and forwards
  • Nature of swaps and how they are valued
  • Basic properties of stock options and trading strategies
  • Option pricing using binomial trees and the Black and Scholes model
  • Modifications to Black and Scholes model to option valuation
  • Hedging positions in options and synthetic options

Assessment

Assessment task 1: Online self-assessment quizzes (Individual)

Objective(s):

This addresses subject learning objective(s):

1, 2, 3 and 4

Weight: 5%
Criteria:

The self-assessment quizzes are entirely multiple choice questions, students will be graded on accuracy of response.

  • Students will receive 5/5 if they complete all of the quizzes within the specified timeframe and score at least an average of 5/10 across all quizzes.
  • Students will receive 3/5 if they complete all of the quizzes within the specified timeframe and score at least an average of 3/10 across all quizzes.
  • Students will receive 1/5 if they complete all of the quizzes within the specified timeframe.
  • If you fail to complete any of the quizzes within the specified timeframes, you will receive 0/5 for this assessment component.

Assessment task 2: Quiz (Individual)

Objective(s):

This addresses subject learning objective(s):

1, 2 and 3

Weight: 25%
Criteria:

The in-class quiz will be graded based on the correctness and accuracy of students numerical answers to practical-based problems and students ability to apply theory to the understanding of different types of derivative securities and their prices necessary to trading derivatives in practice.

Assessment task 3: Assignment (Group)

Objective(s):

This addresses subject learning objective(s):

1, 2, 3 and 4

Weight: 20%
Criteria:

The assignment will be graded based on the correctness and accuracy of students numerical answers to practical-based hedging, arbitrage and trading problems and students ability to apply theory to the understanding of different types of derivative securities and their prices necessary to trading derivatives in practice.

Assessment task 4: Final Examination (Individual)

Objective(s):

This addresses subject learning objective(s):

1, 2, 3 and 4

Weight: 50%
Length:

120 minutes

Criteria:

The final exam will be graded based on the correctness and accuracy of students numerical answers to practical-based hedging, arbitrage and trading problems and students ability to apply theory to the understanding of different types of derivative securities and their prices necessary to trading derivatives in practice.

Minimum requirements

Students must achieve at least 50% of the subject’s total marks.

Required texts

Hull, J.C, Fundamentals of Futures and Options Markets, 8th edition, Pearson. The textbook is the "Global Edition" and has a largely blue front cover.

Recommended texts

The Solutions Manual and Study Guide for the 8th edition of the textbook can be purchased with the textbook. The Solutions Manual provides tentative answers to the tutorial questions taken from the textbook.


Software

Included with the prescribed Hull textbook is an Excel based software program on CD-ROM called DerivaGem (Version 2.01) which can be used to do calculations on various topics areas such as option pricing, delta hedging and greek values. Some of the questions at the end of the textbook chapters refer to the DerivaGem software. You are encouraged to make use of this software as part of your study program. (The author's website can be accessed at www.rotman.utoronto.ca/~hull for more information and updates on the software).

References

Lecture notes

The lecture notes (lecture slides) are available on UTSOnline under Course Documents. The lecture slides contain only the main points, equations and illustrative examples of the subject matter. They focus on the main topics and allow for discussion around those points in the classroom setting. Note that the lecture notes are not a substitute for the recommended textbook.

Additional readings

The following additional textbooks can be consulted for additional reading to the subject:

Chance, D.M. & Brooks, R. 2012. An introduction to derivatives and risk management. 9th ed. Thomson.

Frino, A. & Jarnecic, E. 2005. Introduction to futures and options markets in Australia. Pearson Prentice Hall.

Kolb, R.W. & Overdahl, J.A. 2007. Futures, options, and swaps. 5th ed. Blackwell Publishers.

McDonald, R.L. 2013. Derivatives Markets. 3rd ed. Pearson Addison Wesley.

Faculty of Business (2006), Link to Guide to Writing Assignments:

http://www.uts.edu.au/current-students/business/study-and-assessment-resources/developing-your-academic-writing

Websites

The following websites are useful for this subject:
www.asx.com.au (Australian Stock Exchange)
www.cmegroup.com (CME Group)
www.rba.gov.au (Reserve Bank of Australia)
http://afr.com (Australian Financial Review)
www.futuresmag.com (Futures Magazine)
www.bba.org.uk (British Bankers' Association)