20762 Derivatives and Risk Management
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Subject handbook information prior to 2025 is available in the Archives.
Credit points: 6 cp
Subject level:
Postgraduate
Result type: Grade and marksRequisite(s): 25741 Capital Markets OR 20741 Capital Markets
There are course requisites for this subject. See access conditions.
Anti-requisite(s): 25762 Derivatives and Risk Management
Description
Derivative securities play an important role in current financial markets. This subject provides students with a broad understanding of derivative securities evaluation and how derivative securities can be used for trading and risk management applications. Students learn the fundamentals of derivatives pricing, trading and hedging and develop essential analytical skills by evaluating positions in futures, forwards and options contracts, by assessing and managing risks of derivatives portfolios and by analysing trading strategies and the role of derivatives as risk-transferring devices. The subject also emphasises the considerations and the issues arising in practice with derivatives trading and hedging applications.
Subject learning objectives (SLOs)
| 1. | demonstrate an understanding of concepts, applications and methodologies associated with derivative securities in current financial markets |
|---|---|
| 2. | explain and apply arbitrage principles to pricing of derivative securities |
| 3. | formulate and analyse trading strategies involving derivatives for trading application purposes |
| 4. | devise static and dynamic hedging strategies to assess, critically analyse and manage risk in derivatives markets |
| 5. | implement suitable approaches to derivative security pricing and address key issues arising in risk management practices relevant to derivatives |
Contribution to the development of graduate attributes
This subject contributes to the development of the following graduate attributes:
- Creativity and analytical skills
- Business practice oriented skills
- Critical thinking
This subject is regarded as an advanced course providing the technical and analytical knowledge of applications in derivatives markets. The subject develops students critical thinking and analytical skills through practice-oriented assessments such as real-world case studies, in-class group advanced applications and on-line self-assessment tools. The course compliments the knowledge gained in the investments and corporate finance areas in that it introduces the use of derivative securities to hedge risk. This has become an increasingly demanding and important area and is relevant to both fund managers and corporate treasurers.
This subject also contributes to the following program learning objectives:
- PLO 1.1 - Critical analyse and apply relevant information and concepts to support business decisions
- PLO 5.1 - Apply high level technical skills necessary for professional practice in the finance industry
Teaching and learning strategies
The subject will be taught using a combination of interactive lectures and workshops (i.e. tutorials and case studies). These classes will be supplemented with both printed and electronic learning materials and resources that allow you to interact with the subject outside the classroom. The subject also incorporates interactive in-class activities and authentic assignments where you work collaboratively with other students to analyse risk management and evaluation practices.
Preparation outside class: The subject promotes flipped learning where students are required to work on assigned material before class. Starting from the preparation weeks, instructive material is available on the learning management system, including worksheets, pre-quiz and videos/articles and students are required to interact with the material and complete assigned tasks. During the teaching sessions, students are required to read and reflect upon recommended reading from the textbook and on-line resources available on the learning management system and to cover recommended problems and examples from the text book. Students are cautioned that this subject is an advanced quantitative course that develops analytical skills. Therefore, students are expected to complete the self-study problems to enhance their learning experience and improve their problem-solving skills. It is assumed that you are comfortable with algebraic manipulations and basic elements of statistics (mean, variance, covariance and correlation) and you understand and can apply in practice the basic principles in finance namely: the time value of money and risk-adjusted discount rates.
In-class activities: The subject is presented in a three-hour per seminar format, approximately two-hour lecture and one-hour tutorial. Attendance at lectures is not compulsory. However, students who fail to attend the lectures may find it difficult to successfully complete the course. By going to lectures on a regular basis you will be keeping up to date with the topics covered, have face to face contact with the teaching staff and obtain peer feedback. You will enjoy the subject matter and enhance your learning experience if you read ahead from the recommended textbook before the scheduled lecture. Students also participate to active learning activities, including spreadsheet demonstrations of the tutorial questions and advanced applications requiring students to work in groups, using computer software, to devise and analyse trading and hedging strategies applied in practice. Selected problems will be discussed to reinforce the ideas of the prior 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. Reading the solution to the problems (as provided in the textbook’s Solutions Manual and Study Guide) without attempting to solve them yourself will not result in any real understanding of the subject matter, nor will it prepare you for the assessment tasks. Students do not need to submit solved tutorial questions; they will be discussed in detail in class; notes for the tutorial questions become available on the learning management system after each session.
Online activities: The the learning management system will be used to share information, to provide material for self-study and to encourage interaction between teaching staff and students. You find detailed information about the subject and its assessments, announcements, results, as well as, instructions and feedback on assessments and tutorial problems. A self-assessment task is available on the learning management system. Students are required to complete one self-assessment per topic/lecture consisting of 10 multiple-choice questions. When the self-assessment is completed, students will have access to the result and feedback. A copy of the completed assessment could be saved for future reference or students will be allowed to attempt the same assessment several times. The aim of this self-assessment task is to give the opportunity to the students to assess their knowledge and understanding regularly as well as to provide them with an additional learning aid for the preparation of the exams. The self-assessments are voluntary, but you will significantly benefit if you make an attempt.
Content (topics)
- Introduction to derivative securities and the mechanics of futures and forward markets
- The determination of forward and futures prices
- Hedging strategies using futures
- Trading strategies involving options
- Pricing of stock options
- Options on index, currencies and futures
- Hedging option positions
- Interest rate options
Assessment
Assessment task 1: Case Study (Group)
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3, 4 and 5 |
|---|---|
| Weight: | 25% |
| Criteria: | Assessment is based in a) accuracy of numerical solutions b) use of Excel to perform associated computations and c) students’ ability to communicate efficiently complex analysis to a non-technical audience. |
Assessment task 2: Quizzes (Individual)*
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3, 4 and 5 |
|---|---|
| Weight: | 25% |
| Criteria: | *Note: Late submission of the assessment task will not be marked and awarded a mark of zero. |
Assessment task 3: Final Exam (Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3, 4 and 5 |
|---|---|
| Weight: | 50% |
| Length: | The final exam has 120 minutes duration. |
Minimum requirements
Students must achieve at least 50% of the subject’s total marks.
Required texts
John C. Hull, 2018 "Options, Futures, and Other Derivatives," 9th Edition, Pearson
References
Lecture slides
The lecture notes (lecture slides) are available on Canvas. 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. and Brooks, R. 2010. An introduction to derivatives and risk management. 8th ed. Thomson.
- Frino, A. and Jarnecic, E. 2005. Introduction to futures and options markets in Australia. Pearson Prentice Hall.
- Kolb, R.W. AND Overdahl, J.A. 2007. Futures, options, and swaps. 5th ed. Blackwell Publishers.
- McDonald, R.L. 2013. Derivatives Markets. 3rd ed. Pearson Addison Wesley.
- Guide to Writing Assignments (available at http://www.business.uts.edu.au/teaching/guide/guide.pdf)
Websites
The following websites are useful for this subject:
- www.asx.com.au (Australian Securities Exchange)
- www.cmegroup.com (Chicago Board of Trade)
- www.eurexchange.com (Eurex)
- www.rba.gov.au (Reserve Bank of Australia)
- www.afr.com (Australian Financial Review)
- www.bba.org.uk (British Bankers' Association)
Other resources
Solution Manual and Study Guide
The Solutions Manual and Study Guide for the 9th 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 (via download access to the publisher's website) is an Excel-based software program called DerivaGem 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. While not required, you are encouraged to use this software as part of your study program.