25620 Derivative Securities
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particular session, location and mode of offering is the authoritative source
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Subject handbook information prior to 2025 is available in the Archives.
Credit points: 6 cp
Subject level:
Undergraduate
Result type: Grade and marksRequisite(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)
| 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 problem solving, 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:
- Intellectual rigour and innovative problem solving
- Communication and collaboration
- Professional and technical competence
Teaching and learning strategies
Derivative Securities will be taught using a combination of interactive lecture and tutorial classes supplemented with flipped learning activities. The UTS Learning Management System 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 the UTS Learning Management System.
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 subject. 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, 25624 Financial Metrics for Decision Making and 25503 Investment Analysis provide the background knowledge required to handle this content, it is highly recommended that you complete these subjects 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 the UTS Learning Management System 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 the UTS Learning Management System. 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 the UTS Learning Management System 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. 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 a 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 the UTS Learning Management System, 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: | 10% |
| Criteria: |
*Note: Late submission of the assessment task will not be marked and awarded a mark of zero. |
Assessment task 2: Quiz (Individual)*
| Objective(s): | This addresses subject learning objective(s): 1, 2 and 3 |
|---|---|
| Weight: | 20% |
| Length: | 80 minutes |
| 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. *Note: Late submission of the assessment task will not be marked and awarded a mark of zero. Students who fail to attend the quiz will have the weighting of that assessment task added to the final examination conditional on the students submitting, receiving approval and complying with the requirements of special consideration in accordance with the UTS rules. If the composite mark for the final exam is more than 50 percent and the student is in the final subject of their degree, the UTS rules on borderline result (range of 45-49, inclusive) shall apply whereby students will be allowed to undertake a supplementary final examination. Where a student completes and passes a supplementary examination, the maximum mark awarded for the subject will be 50 Pass. |
Assessment task 3: Assignment (Group)
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3 and 4 |
|---|---|
| Weight: | 30% |
| Length: | The answers to the assignment should be no more than 3,000 words, not including equations, calculations and figures. |
| 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: | 40% |
| Length: | 2 hours |
| 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 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. Use of the software is not required since most functionality can be easily reproduced in Excel yourself. However, feel free to check it out. (The author's website can be accessed at www.-2.rotman.utoronto.ca/~hull for more information and updates on the software).
References
Lecture notes
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:
Websites
The following websites are useful for this subject:
www.asx.com.au (Australian Securities 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)