KIMEP University Bang College of Business Fall Semester 2013 Course Syllabus for: FIN4224 Introduction to Financial Derivatives _______________________________________________________________________________ 1. Basic Information Course Code and Title: FIN4224 Introduction to Financial Derivatives Meeting Time and Place: Monday & Wednesday 16:00 – 17:15 in Rm #117/NAB Course Credit: Three (3) credits Instructor: Name: Sang Hoon Lee Office: Room #338/ Dostyk Building Phone: 270 - 4440 ext. 2058 e-mail: shlee@kimep.kz 2. Instructor Availability Office/Advising Hours: 14:30 – 16:00 Mon & Wed, 17:30 – 19:00 Tue & Thr Additional hours will be available by appointments. 3. Instructional Resources Required textbook: John Hull, Fundamentals of Futures and Options Markets, 7th ed. Pearson, 2010 Reference Materials: John Hull, Options, Futures, and Other Derivatives, 7th ed. Pearson, 2009 Robert McDonald, Derivatives Markets, 2nd ed. Pearson, 2006 Wall Street Journal, Financial Times, and other financial periodicals 4. Course Description/ Overview A derivative is any financial instrument, whose payoffs depend in a direct way on the value of an underlying asset at a time in the future. Usually, derivatives are contracts to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined today. This course places emphasis on market operations and the valuations of forward, futures, swaps, and options contracts and their interrelations. Major topics of trading strategies include hedging, arbitrage and speculation, and of market operations on stock index, interest rate instruments, and foreign currencies. Binomial and Black-Sholes option pricing models as well as recent innovations in derivative markets are discussed. 5. Learning Objectives At the end of the course, students should be able to do the followings: Knowledge: Students will have an understanding of Various theories on valuations of financial derivatives The relationships of financial derivatives with other financial instruments The usses and market functions of financial derivatives Concepts of hedging, arbitrage, and management of financial risks Skills: Students will learn to Use various financial functions and models in financial calculations Use statistical and mathematical concepts in developing derivative strategies Use option pricing models in pricing and identifying profit opportunities in financial instruments Application abilities: Students will be able to Formulate hedging, arbitrage, and speculative strategies with derivatives Apply derivative pricing models to evaluate performances of financial assets and positions Compare relative performances of various financial instruments and investment strategies Evaluate the effects of derivative regulations and market (in)efficiencies Values and Attitudes: Students will be able to 6. Understand the risk of the misuse and/or abuse of financial derivatives Understand market failures caused by excessive risk-taking with financial derivatives Understand the importance of appropriate disclosure of risk in the financial derivatives Understand adverse selection and moral hazard problems in the financial markets Teaching Methodology In a typical session, the instructor provides lectures on major issues and theories followed by discussions of cases, examples, and exercises. Students are expected to read lecture notes and chapter materials ahead of time. The Power-Point lecture notes slides are available in the L-Drive and the reading materials in the textbook are assigned before the class. Problem solving and case analysis are other frequently used teaching methodologies to improve students’ understanding of complex materials. 7. Assessment Scheme Continuous Assessment: Quizzes: 2 times, 5 points each, a total of 10 points (10%) Mid-term exams: 2 times, 20 points each, a total of 40 points (40%) Class attendance and participation: a total of 10 points (10%) 60% Final Assessment: 40% In-class final exam during final exam period, 30 points (30%) Take-home essay exam, 10 points (10%) Assessment Tools Frequency Weights Total weights Quizzes* 2 times 5% 10% Mid-term Exam 2 times 20% 40% Attendance 15 weeks 0.67% 10% 10% 10% 10 hours total 30% 30% 15 hours total Continuing Assessment (60%) Take-home Essay Exam 1 submission Final Assessment (40%) In-class Final Exam* 1 time Required Self-study Hours 4 hours per quiz, 8 hours total 10 hours per exam, 20 hours total For each week, students are required to have 3 hours of self study, total 39 hours Lectures 45 hours 100% Total: 137 hours *No make-ups are allowed for any missed quizzes and the final exam. Only pre-excused cases are considered for make-up or applying alternative evaluation methods on the Mid-term exam. 8. Grading Scale Letter grades for the course will follow the same standards as specified in the 2010-2011 Catalog. See the following table for grading scale: Grade quality A+ A AB+ B BC+ C CD+ D DF Numerical scale Or percentile 90 - 100 85 - 89 80 - 84 77 - 79 73 - 76 70 - 72 67 - 69 63 - 66 60 - 62 57 - 59 53 - 56 50 - 52 Below 50 9. Course Policies and Instructor’s Expectations of Students The instructor has the following course policies and expectations: Students should exhibit willingness to learn and commitment to participate class discussions on related topics and current financial issues. Students should be open-minded as well as critically thinking – No stereotyped opinion or biased perception on certain financial policies or markets are allowed. Students should respect unique financial and economic circumstances originated from different historical backgrounds of countries. However, at the same time, students should critically think by asking “why so?” and “so what?” to improve understanding of the market operations and draw ideas of promoting the efficiency of financial markets. Students should be able to demonstrate the abilities to grasp big pictures and identify flows and frames of ideas on financial market trend, technology development, instruments and issues. Students should respect class disciplines. Students are required to attend and to be on time for all classes. Mobile phones and other electronic devices that could disrupt class must be turned off upon entering the classroom. Academic dishonesty is considered a serious offense and is forbidden. Assumptions, both explicit and implicit, are widely used in financial theories, cases, examples and exam questions for learning purpose. Students should be prepared to accept these assumptions although debates within reasonable limits can be allowed. 10. Period-by-period Schedule (Tentative) Week Contents and Assignments Chapter(s) Estimated time for Self-study 1 Introduction to Financial Derivatives, Key terms and definition, Course guidelines Chapter 1 3 2 Mechanics of Futures Markets, Contract specifications, Settlement and Margin Operation Chapter 2 3 3 Hedging Strategies using Futures, Basis risk, Hedge Ratio, Rolling hedging, Stock index futures operation Quiz 1 Interest rate basics, Zero rates, Implied forward rates, Forward rate agreements Chapter 3 3 Chapter 4 4+3 Chapter 5 3 4 5 Forward and Futures, Arbitrage conditions, Valuing forward contracts 6 Review and Mid-term Exam 1 Chapter 6 10 7 Interest Rate Futures, Quotations, Eurodollar and T-Bill futures, T-bond futures, Hedging, Arbitrage, Speculation strategies Swaps, Comparative advantage argument, LIBOR/Swap zero rates, Valuation of swaps Chapter 6 3 Chapter 7 3 9 Securitization and the Credit Crisis of 2007 Chapter 8 3 10 Mechanics of Options Markets, Terms and Definitions, Option positions Chapter 9 3 11 Properties of Stock Options, Put-call parity, Option price ranges, Effect of benefits and dividends Chapter 10 3 Chapter 11 3 Chapter 12 4+3 Chapter 13 3 8 12 13 Options Trading Strategies, Straddle, Strangle, Strap, Strip, Spread Quiz 2 Binomial Trees, Binomial option pricing model, European vs. American options 14 Black-Scholes Option Pricing Model, Volatility, Implied volatility 15 Review and Mid-term Exam 2 1-15 Attendance of classes 1- 15 Total continuing assessment 16 Special Topics, Review and Final Exam Remarks 5% of Grade 20% of Grade 5% of Grade 10 20% of Grade 45 10% of Grade 112 60% of Grade 15 30% of Grade 16 Take-home Essay Exam at the end of the semester 10 10% of Grade 16 Total Final assessment 25 40% of Grade 137 100% 1-16 Total 11. Course Objectives and Their Assessment Learning Outcomes How they will be taught How to assess Operations and Pricing of Financial Futures Introduction on futures markets, mechanics of operations, and functions of various participants using textbook, reference materials, and lecture notes Homework, quiz, exams, inclass participation and discussions Hedging, Arbitrage, and Speculative Strategies with Financial Futures Introduce hedging, arbitrage, and speculative strategies using lectures, graphical presentations, in-class exercises, and problem solving Homework, quiz, exams, inclass participation and discussions Operation and Pricing of Swaps Introduction on swap markets, mechanics of operations, and functions of various participants using textbook, reference materials, and lecture notes Homework, quiz, exams, inclass participation and discussions Strategies using Interest and Currency Swaps Introduce interest swap and currency swap, various risk management strategies, swap pricing using graphical presentations, in-class exercises, and problem solving Homework, quiz, exams, inclass participation and discussions Operations and Pricing of Financial Options Introduction on binomial and Black-Sholes option pricing models, mechanics of option market operations, and functions of various participants using textbook, reference materials, and lecture notes Homework, quiz, exams, inclass participation and discussions Option Strategies Introduce various option strategies and combinations of strategies using graphical presentations, in-class exercises, and problem solving Homework, quiz, exams, inclass participation and discussions Causes and consequences of Financial Crisis Introduce the causes and consequences of previous financial crises using the concept of asymmetry of information in financial market and the resulting problems such as adverse selection and moral hazard to lead financial crises Take-home essay-type exam, inclass participation and discussions