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SCHOOL OF BUSINESS ADMINISTRATION
SYLLABUS
SUMMER I 2016
SPECULATIVE MARKETS (iMBA 776)
: Dr. D.K. Malhotra
: 104 Tuttleman
: (215) 951-2813
: Malhotrad@philau.edu
: http://faculty.philau.edu/MalhotraD
: 11:00 a.m. - 12:30 pm Monday and Wednesdays or by
Required Text:
An Introduction to Derivatives and Risk Management by Don M. Chance and
Robert Brooks, 10th edition, Cengage, 2016, ISBN-10: 130510496X
Additional Recommended Readings:
The Wall Street Journal
Barron’s Paper
Course Description: This course will provide an overview of the financial futures,
options and swaps. Areas covered will include a discussion on various types of
options, futures, and swap contracts in use in financial markets, and use of these
securities to manage risk. Most of the material will be discussion oriented.
Course Objective: This course is intended to introduce the MBA students to
financial futures, options, and swaps. The objective of this course is to clearly
explain why these securities exist, where and how they are traded, how to employ
them to manage risk, and how to accurately price them. The course will present a
balance of the institutional details, theoretical foundations, and practical
applications of this field. It will provide information students need to embark on a
career in speculative markets.
Prerequisites: All students must have completed iMBA 629 and iMBA 772.
It is the students' responsibility to make certain that they have successfully completed
these courses. If at any time during the semester it is learned that a student has not
successfully completed these prerequisites, he/she will be dropped from the course
receiving, neither credit nor tuition refunds.
Requirements:
1. Attend class regularly.
2. Do Class Assignments.
3. Study class notes prior to next class and come prepared to the class to
participate actively in discussions.
4. Be able to take time pressure tests.
Attendance:
Attendance is mandatory. You are responsible for what is covered in the class and
any absence on your part leaves you responsible for finding out what was presented
in class. You will benefit a lot from the course by doing problems and reviewing
concepts that are covered in the class.
Grading:
In Class Quizzes
Homework Assignments
Class Participation
Online Options Trading
20%
60%
10%
10%
No late homework will be accepted. No makeup exams will be given. If you miss an
exam due to an unavoidable reason, the grade on the missed exam will be
transferred to the final exam. THE FINAL EXAM IS COMPULSORY AND
COMPREHENSIVE. DO NOT EXPECT ANY SCALING ON THE GRADES.
Academic Honesty:
Students are expected to perform according to a code of academic honesty that
prohibits cheating on tests and plagiarizing others' work. Violation of this code may
result in failure of the course.
Grading Policy:
The following policy will be followed for assigning letter grades in this course.
93 and above A
90 - 92
A87 - 89
B+
83 - 86
B
80 - 82
B77 - 79
C+
73 - 76
C
70 - 72
CLess than 70 F
Tentative Course Outline:
05/17 An Introduction to Options, Forward, and Futures
Markets (Chapters 1 and Chapter 2)
The Concept of Derivatives
Futures and Forward Contracts
Options
Other Exotic Products
Participants
05/19 The Structure of Options Markets (Chapter 2)
Types of Options
Option Positions
Characteristics of Option Contracts
05/24 Principles of Option Pricing (Chapter 3)
Factors affecting Option Prices
Upper and Lower Bounds for Option Prices
Early Exercise of Calls and Put Options
05/26 Principles of Option Pricing
Put-Call Parity
The Effect of Dividends
05/31 Basic Option Strategies (Chapter 5)
Stock Transactions
Call Option Transactions
Put Option Transactions
An Option and a Stock
06/02 Advanced Option Strategies (Chapter 6)
Spreads
Combinations
Other Payoffs
06/07 Option Pricing Models--Binomial Option Pricing Model
(Chapter 4)
One Step Binomial Model
Two Step Binomial Model
The Concept of Delta and Risk Free Portfolio
Option Pricing Models--Black-Scholes Option Pricing
Model (Chapter 4)
Assumptions underlying Black-Scholes
The Black-Scholes Analysis
Implied Volatility
Sensitivity of Individual Options
Dividends
06/09 The Structure of Futures Markets (Chapter 7)
The Specifications of the Futures Contract
Convergence of Futures Price of Spot Price
The Operation of Margins
06/14 Principles of Spot and Futures Pricing (Chapter 8)
Properties of Forwards and Futures Prices
Forward versus Futures Prices
A Forward and Futures Pricing Model
06/16 Futures Hedging Strategies (Chapter 9)
Determination of Hedge Ratio
Minimum Variance Hedge Ratio
Duration-Based Hedging Strategies
Treasury Bond and Treasury Note Futures
Stock Index Futures Hedge
Hedging Strategies
06/21 Swaps and the concept of Financial Engineering
Interest Rate Swaps
Variants of Interest Rate Swaps
Mechanics of Interest Rate Swaps
Currency Swaps
Variants of Currency Swaps
Mechanics of Currency Swaps
Next wave of Derivatives
06/23 Swaps
Additional Recommended Reading:
1. An Introduction to Options, Forward, and Futures Markets
Hull, John. Options, Futures, and Other Derivative Securities, Chapter 1. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
2. The Structure of Options Markets
Hull, John. Options, Futures, and Other Derivative Securities. Englewood Cliffs, N.J.:
Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
3. Principles of Option Pricing
Hull, John. Options, Futures, and Other Derivative Securities. Englewood Cliffs, N.J.:
Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
Stoll, Hans R. “The Relationship between Put and Call Option Prices.” The Journal of
Finance 31 May (1969): 319-332.
4. Option Pricing Models
Hull, John. Options, Futures, and Other Derivative Securities. Englewood Cliffs, N.J.:
Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
Black, Fischer. “Fact and Fantasy in the Use of Options.” Financial Analysts Journal
31 (July-August 1975): 36-41, 61-72.
Cox, John C., Stephen A. Ross, and Mark Rubinstein. "Option Pricing: A Simplified
Approach." Journal of Financial Economics 7 (September 1979): 229-263.
Hsia, Chi-Cheng. "On Binomial Option Pricing." The Journal of Financial Research 6
(Spring 1983): 41-50.
Black, Fischer, and Myron Scholes. "The Pricing of Options and Corporate
Liabilities." Journal of Political Economy 81 (May-June 1973): 637-659.
Smith, Clifford W., Jr. "Option Pricing: A Review." Journal of Financial Economics 3
(January-March 1976): 3-51.
Brennan, Michael J., and Eduardo S. Schwartz. "The Valuation of American Put
Options." The Journal of Finance 32 (May 1977): 449-462.
5. Basic Option Strategies
Galai, Dan. “Characterization of Options.” Journal of Banking and Finance 1
(December 1977): 373-385.
Grube, R. Corwin, Don B. Panton, and J. Michael Terrell. “Risks and Rewards in
Covered Call Positions.” The Journal of Portfolio Management 5 (Winter 1979): 6468.
Pounds, Henry M. “Covered Call Options Writing: Strategies and Results.” The
Journal of Portfolio Management 5 (Winter 1978): 31-42.
Singleton, J.Clay, and Robin Grieves. "Synthetic Puts and Portfolio Insurance
Strategies." The Journal of Portfolio Management 10 (Spring 1984): 63-69.
6. Advanced Option Strategies
Hull, John. Options, Futures, and Other Derivative Securities. Englewood Cliffs, N.J.:
Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
Frankfurter, George, Richard Steveson, and Allan Young. “Options Spreading:
Theory and Illustration.” The Journal of Portfolio Management 5 (Summer 1979):
59-63.
Silvka, Ron. “Call Option Spreading.” The Journal of Portfolio Management 7 (Spring
1981): 71-76.
8. The Structure of Futures Markets, Principles of Futures Pricing, and Futures
Hedging Strategies
Hull, John. Options, Futures, and Other Derivative Securities. Englewood Cliffs, N.J.:
Prentice Hall, 1992.
Stoll, Hans R. and Robert E. Whaley. Futures and Options: Theory and Applications.
South-Western Publishing company, 1992.
Hull, John. Introduction to Futures and Options Markets. Prentice Hall, 1992.
9. Swaps, Swaptions, Caps, Collars, and Floors and the concept of Financial
Engineering
Bicksler, James and Andrew Chen. "An Economic Analysis of Interest Rate Swaps."
Journal of Finance, July 1987.
Wall, Larry D., and John J. Pringle. "Alternative Explanations of Interest Rate
Swaps." Financial Management 18 (Summer 1989): 59-73.
Evans, John S. and D.K. Malhotra. “Understanding Cross-Currency Swaps.” The
Banker’s Magazine, March/April 1994.
McLeod, Robert and D.K. Malhotra. “Emerging Trends in Interest Rate Swaps.” The
Banker’s Magazine, May/June 1993, 37-44.
Brooks, Robert and D.K. Malhotra. “Components of Bid-Ask Spread in Default-Risky
Interest Rate Swaps.” Advances in Futures and s Option Research, Volume 7, 1994,
237-249.
Malhotra, D.K., and John S. Evans. “Exchange Rate Risk Management Using CrossCurrency Swaps and Swaptions.” Journal of Commercial Lending, July 1995.
Malhotra, D.K. "Duration of a Cross-Currency Swap Contract and Exchange Rate and
Interest Rate Risk Management." Journal of Multinational Financial Management,
March 1996.