MGFC30
Introduction to Derivative Markets
Winter 2024
Instructor Contact Information:
Name: Dr. Ata Mazaheri
Office: IC288
Office hours: Wednesdays 2-3PM, Thursday 10-11AM
Email: ata.mazaheri@utoronto.ca
Telephone: 416-287-7348
Course website: http: portal.utoronto.ca
Course Delivery
In person
Course Description:
Since 1970s there has been considerable growth in markets for derivative instruments – futures, swaps,
and options. This growth has only accelerated in the post 1990s with the advent of the new risk
management tools. Using these instruments, individuals and institutions can achieve different
objectives; they can hedge against a particular type of risk, or they can alter the distribution of the
returns on their portfolios in certain ways. There is enormous line of literature – mostly current - on
futures, swaps, and options. While at first glance the theory appears advanced and difficult, in reality it
is quite logical and increasingly accessible. This course intends to introduce you to the theory and
application of the derivatives market. It attempts to provide you the required skills to value and to
employ futures, swaps, and options.
The course studies the derivatives markets in two main parts. The first part examines the structure of
futures and forward markets as well as issues related to the pricing of such contracts and their hedging, it
will end with a short introduction to swaps. In the second part, options markets, strategies, pricing and
position analysis are studied.
Course Objectives
When you finish this course, you will learn:
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How to use the futures to hedge risk.
Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
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•
•
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How to price futures contracts.
How to price and use “plain vanilla” interest swap contracts.
How to trade options and how to construct option strategies.
How to use binomial tree and Black-Scholes model to price options.
How to trade and price exotic options.
A combination of lecture, problem sets, and assignments is used to illustrate the various topics of study.
You will be required to study the presented material thoroughly.
Prerequisite(s):
MGFB09H3 (Principles of Finance) or MGTC02Y (Introductory and Intermediate Finance), plus
MGEB11H (Quantitative Methods in Economics I) or MGEB09Y (Quantitative Methods in
Economics). The co-requisite is MGTC09H3 (Intermediate Finance). Those who have taken
RSM435H or the previous MGT438 (Futures and Options Markets) on St. George Campus are not
allowed to take this course.
Textbook/Required Course Materials:
Fundamentals of Futures and Options Markets, 9th Edition, by John Hull (Pearson, 2017).
Lecture Notes and Other Announcements:
• Lecture notes are posted on the portal several days ahead of the lecture. It is important to read them
before attending each lecture. It is necessary to try the assigned problems after each lecture before
attending the next lecture.
• Supplemental sample problems will be posted on the website. Some of those questions will be
taken during the tutorials. Practice the questions before attending the scheduled tutorial sessions.
• Obviously, we cannot cover every part of the course during lectures. I expect you to have studied
and learned the assigned parts in the textbook.
Evaluation and Grading:
Component
Weight/Value
Due Date
Test-1
20%
TBA
Test-2
20%
TBA
1 Group Assignments
10%
April 5
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Final
50%
TBA
Coverage
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•
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Test-1: Week-1 to the end of Week-5 lecture. (Please refer to the detailed Schedule)
Test-2: Week-6 to Week-9. (Please refer to the detailed Schedule)
Final Exam: Inclusive of all the material learned in the lecture.
The Assignment is done within groups 5 or 6.
Aids Allowed for Term Tests and Final Exam
• The term tests as well as the final are closed book assessments.
• You are allowed one side of a one standard paper help sheet (hand-written) and the use of a nonprogrammable calculator.
Policy on Missed Assignments/Examinations:
There will be no makeup test. If you miss a term test for any reason, the final exam will be re-adjusted
for the total of 70%. No documentation is required. If you miss both term tests, the second miss will be
automatically zero.
Policy on Re-Grading
_______________________________________________________________________________
If, after looking over your term tests, and reviewing you answers and comparing it with the posted
solutions, you feel that there has been a material error or omission in the marking of your term test, you
must observe the following procedures:
1. Create a typed note containing the following: (i) Your names, (ii) Your Student Number, (iii) Your email address, so I can communicate with you (iv) The criterion (criteria) against which you believe you
have been graded incorrectly, or an explanation of why the marker has overlooked or misunderstood
your answer's merits, or has re-acted too severely to your answer's short-comings. Hand-written
submissions will not be considered.
2. Deliver your re-grading requests to me in class one week after the test is handed back. No re-grading
requests will be considered either before or after that time.
3. Re-grading will be based only on what you submit in writing, not what you might say in person. Marks
are not the subject of "discussion" or negotiation.
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4. Your test will be re-considered, based on your written comments and clarifications. Re-grading
means that your answer(s) will be re-evaluated and a new grade may be assigned. This means that it is
possible to lose marks as well as to gain marks through re-grading. Therefore, please do not submit
your materials for re-grading unless you are confident that a grading error occurred. Keep in mind that
the re-grade is meant for mistakes in grading. It is not a forum for arguing about the criteria used, or
the points allocated to the criteria.
5. Addition Errors or minor petition: If there is an error in totaling up your mark or that you have a
minor petition on a single part of the Test (say only part (a) of Q2), then you may write this on the
cover of your Test paper material and hand it to me on the due date. No written petition is required.
SIMULATION — RPM INVESTMENT CHALLENGE
The purpose of your simulation project is to introduce realism in learning. A group of five or six
students will perform the task of setting up and managing an options portfolio (students may also form
a smaller group as they wish, but the minimum size should be two). Through trading derivatives on
formal exchanges, students are expected to learn and appreciate the workings of the derivatives
markets, and to apply their knowledge and wisdom in the investment world.
The virtual investment project will be done using the Rotman Portfolio Manager (RPM) platform.
[http://rpm.rotman.utoronto.ca/] The RPM is an application that allows students to manage a fantasy
portfolio of stocks, options, futures, bonds, and foreign exchange. The software connects the student
to North American Exchanges and provides market quotes, security filtering, advanced trading
features, custom benchmarking, and attribution analysis so that students can manage and analyze their
portfolios in real time. This powerful simulation gives students an opportunity to experience and
explore portfolio management in a very realistic and robust setting.
The investment game will start on January 29, 2024 (Monday) and end on March 29 (Friday) 2024.
Each account will be endowed with $5,000,000Cdn virtual money, and participants will have access to
stocks (North American as well as international), options, futures, futures options, bonds, currencies,
and mutual funds. In this simulation, students are required to trade only derivatives: options,
futures and options on futures.
Overall Instructions and Requirements
Each group will maintain a trading account with an initial endowment of $5,000,000Cdn. Students are
allowed to trade derivatives only. The position limit is 50%, meaning that you cannot invest more than
50% of your capital in a single security. Day trading will be allowed. All groups will be subject to the
same investment restrictions set out by RPM regarding margin requirements and transaction costs.
Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
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To register your account, follow the instructions provided in a separate file posted on the Quercus.
Note each group need to purchase one account.
The objective of your trading strategy – obviously – is to maximize your return. For that matter you
can trade (buy or sell) any derivative (options / futures) you wish using any strategy you have in mind.
You can use any information, any judgment, or any gut feelings. In summary: you can do whatever
wish with any derivative.
The overall evaluation of the project is based on two components:
First, 5% is awarded to the best performing portfolio. Having said that, I will use a little bit of my own
discretion on this. For instance, if the best performing portfolio returns only a 6%, then I will be very
hesitant to give 5% to this group.
To earn the credit based on portfolio performance, groups must meet the following requirements:
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•
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Execute a minimum of 15 transactions throughout the simulation.
Deploy at least 50% of the initial capital (i.e., you must invest at least half of your initial
capital).
Send my TA an email message of several sentences each week before class, informing me
what you have done with your portfolio and why you took the action (or no-action). There
will be 0.5 deduction for a missed weekly Email.
Second: 5% is awarded based on a final report of 1200-1300 words. The report is due on April 8 and
should be written in accordance to the guideline that will be posted on the portal. In general, it will
provide a summary explaining the investment strategies, the success and the failures of the adopted
strategy. It can also discuss what are the most valuable lessons you have learnt.
In summary:
•
•
The 10% mark is based on your performance as well the strategy applied and explained in your
write-up.
Portfolio performance will be based solely on the closing value at the end of the simulation.
The history of portfolio performance does not matter.
Several popular resources for stock analysis and trading strategies:
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http://www.barchart.com
http://www.marketwatch.com
http://www.bnn.ca/
Good luck and Enjoy!
Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
www.utsc.utoronto.ca/mgmt
5
Statement on Equity, Diversity, and Inclusion (EDI)
The University of Toronto is committed to equity, human rights and respect for diversity. All members
of the learning environment in this course should strive to create an atmosphere of mutual respect
where all members of our community can express themselves, engage with each other, and respect one
another’s differences. U of T does not condone discrimination or harassment against any persons or
communities.
If you have questions or concerns on issues related to EDI, please contact the Equity, Diversity and
Inclusion Office: https://www.utsc.utoronto.ca/edio/
Office Hours:
Office hours for individual consultation with students who have problems or questions that cannot be
discussed in the class sessions will be announced by the instructor in Quercus.
Questions relating to administrative, registration, degree/program requirements should be directed to the
academic advising team:
Management programs/courses: mgmtss@utsc.utoronto.ca.
Economics programs/courses: ecoss.utsc@utoronto.ca.
UTSC Library:
Management students can access library services at The BRIDGE, located in IC 108. The BRIDGE
offers programs and services to support students, staff, and faculty in their studies, research projects,
and experiential learning initiatives. https://www.utsc.utoronto.ca/thebridge/
Visit The BRIDGE to:
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•
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Access the finance & data lab, including specialized software and Bloomberg terminals
Participate in events and competitions
Get research and data analytics help
Access data and academic research tools and tutorials
Get support in entrepreneurship and the New Venture Program
Learn more about Work Integrated Learning
To find out more about the UTSC Library’s support for students visit: https://utsc.library.utoronto.ca/
For all other inquiries, please email thebridge@utsc.utoronto.ca or email your Liaison Librarian,
Mariana Jardim mariana.jardim@utoronto.ca
Health & Wellness Centre:
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The Health & Wellness Centre provides professional and confidential medical, nursing, counselling,
health promotion, and education services to all UTSC students. These services are offered in a safe,
caring, respectful, and empowering environment that is directed toward optimizing your personal,
academic, and overall wellbeing.. To access these services, please use the following url:
https://www.utsc.utoronto.ca/hwc/ and when visiting the Health & Wellness Centre, please bring a
valid T-card and Health card.
Academic Advising and Career Centre:
The Academic Advising and Career Centre (AA&CC) at UTSC integrates developmental advising,
learning/study skills, career counselling, and employment coaching. To reach out to them please use
the following url: https://www.utsc.utoronto.ca/aacc/
Quercus – UTSC Learning Management System
To access Quercus, please visit: https://q.utoronto.ca
If you need help getting started? Visit the Quercus Help Page to access tip-sheets and other helpful
resources.
For additional questions, contact the Ed Tech team at quercus@utsc.utoronto.ca.
For frequently asked questions, please visit: https://www.utsc.utoronto.ca/technology/faq-students
AccessAbility Services
The University provides academic accommodations for students with disabilities in accordance with
the terms of the Ontario Human Rights Code. This occurs through a collaborative process that
acknowledges a collective obligation to develop an accessible learning environment that both meets
the needs of students and preserves the essential academic requirements of the University’s courses
and programs.
Students with diverse learning styles and needs are welcome in this course. If you have a disability that
may require accommodations, please feel free to approach me and/or the Accessibility Services office.
https://www.utsc.utoronto.ca/ability/welcome-accessability-services
The Centre of Teaching and Learning
The Centre for Teaching and Learning (CTL) is available to support you in your writing, math and
stats, and English language needs. It offers online and in-person tutoring and consultations and has a
variety of helpful resources.
English Language Development Centre:
The English Language Development Centre (ELDC) helps students develop the critical
thinking, vocabulary and academic communication skills essential for achieving academic and
professional success. Personalized support includes: RWE (for academic writing);
Communication Cafés (oral); Discussion Skill-Building Cafés; Vocabulary Cafés;
seminars/workshops; personal ELD consultations; drop-in sessions.
https://www.utsc.utoronto.ca/ctl/english-language-development-support
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The Writing Centre:
The Writing Centre (TWC) offers invaluable services to students (learn to become a better
writer!) and offers many different kinds of help: drop-in sessions, individual consultations,
workshops, clinics, and online writing handouts. https://www.utsc.utoronto.ca/ctl/writingsupport
Other Support:
For more information regarding other academic support from the university, please visit CTL’s
Student Resource Centre at AC313 or check out https://www.utsc.utoronto.ca/ctl/academiclearning-support.
Policy on Re-Grading
_______________________________________________________________________________
If, after looking over your term tests, and reviewing you answers and comparing it with the posted
solutions, you feel that there has been a material error or omission in the marking of your term test, you
must observe the following procedures:
1. Create a typed note containing the following: (i) Your names, (ii) Your Student Number, (iii) Your email address, so I can communicate with you (iv) The criterion (criteria) against which you believe you
have been graded incorrectly, or an explanation of why the marker has overlooked or misunderstood
your answer's merits, or has re-acted too severely to your answer's short-comings. Hand written
submissions will not be considered.
2. Deliver your re-grading requests to me in class one week after the test is handed back. No re-grading
requests will be considered either before or after that time.
3. Re-grading will be based only on what you submit in writing, not what you might say in person. Marks
are not the subject of "discussion" or negotiation.
4. Your test will be re-considered, based on your written comments and clarifications. Re-grading
means that your answer(s) will be re-evaluated and a new grade may be assigned. This means that it is
possible to lose marks as well as to gain marks through re-grading. Therefore, please do not submit
your materials for re-grading unless you are confident that a grading error occurred. Keep in mind that
the re-grade is meant for mistakes in grading. It is not a forum for arguing about the criteria used, or
the points allocated to the criteria.
5. Addition Errors or minor petition: If there is an error in totaling up your mark or that you have a
minor petition on a single part of the Test (say only part (a) of Q2), then you may write this on the
cover of your Test paper material and hand it to me on the due date. No written petition is required.
Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
www.utsc.utoronto.ca/mgmt
8
Statement on Equity, Diversity, and Inclusion (EDI)
The University of Toronto is committed to equity, human rights and respect for diversity. All members
of the learning environment in this course should strive to create an atmosphere of mutual respect
where all members of our community can express themselves, engage with each other, and respect one
another’s differences. U of T does not condone discrimination or harassment against any persons or
communities.
If you have questions or concerns on issues related to EDI, please contact the Equity, Diversity and
Inclusion Office: https://www.utsc.utoronto.ca/edio/
Statement on AI
The knowing use of generative artificial intelligence tools, including ChatGPT and other AI writing
and coding assistants, for the completion of, or to support the completion of, an examination, term test,
assignment, or any other form of academic assessment, may be considered an academic offense in this
course.
Academic Misconduct
Students should note that copying, plagiarizing, or other forms of academic misconduct will not be
tolerated. Any student caught engaging in such activities will be subject to academic discipline
ranging from a mark of zero on the assignment, test or examination to dismissal from the university as
outlined in the academic handbook. Any student abetting or otherwise assisting in such misconduct
will also be subject to academic penalties.
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Detailed Course Outline:
TOPIC
READINGS
Assignment
Week-1
Introduction
Chapter 1
1.1, 1.2, 1.3, 1.4, 1.6
Week-2
Futures Market
Hedging Strategies Using Futures
Chapter 2
Chapter 3
Week-3
Interest Rates & Duration
Chapter 4
Week-4
Determination of Forwards and Futures Prices
Chapter 5
Week-5
Interest Rate Futures
Chapter 6
2.16, 2.17, 2.23
3.1, 3.3, 3.5
Problem Set-1
4.1, 4.5, 4.7
Problem Set-2
5.2, 5.5, 5.6, 5.7
Problem Set-3
6.1, 6.2
Problem Set-4
Week-6
Test-1
Swaps
Chapter 7
Week-7
Options Markets: Mechanisms and Properties
Chapter 9
Chapter 10
Week-8
Trading Strategies
Chapter 11
Week-9
Binomial Trees
Chapter 12
Week-10
Test-2
The Black-Scholes-Merton Model
Chapter 13
Week-11
Week-12
Options on Stock Indices, Currencies and Futures
Exotic Options
Final Review
Chapter 15
Chapter 22
7.1, 7.3
Problem Set-5
9.1, 9.4, 9.6, 9.25
10.1, 10.2, 10.3, 10.4,
10.5, 10.6, 10.23, 10.25
Problem Set-6
11.2, 11.3, 11.6, 11.20
Problem Set-7
12.1, 12.3, 12.5, 12.20
Problem Set-8
13.2,13.4,13.5,13.6,
13.20,13.23, 13.24
Problem Set-9
15.1, 15.2, 15.28
22.1, 22.3
Problem Set-10
Note: Chapter references are to John C. Hull’s textbook.
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