ACCOUNTING I

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Financial Innovations
FALL 2007
Department of Finance
National Taiwan University
Instructor: Dr. San-Lin Chung
Office: Room 707, Building 2, College of Management
Phone: 33661084
Email: [email protected]
Class hours: Thursday 2:20 pm – 5:20 pm
Office hours: by appointment
Course Objective:
Financial innovations can be broadly divided into two parts: product innovations and process
innovations. This course will mainly focus on the financial product innovations. This course
is to expose students to general design principles, pricing, risk management, and practices of
financial product innovations in Taiwan and of international transactions. The detailed topics
covered in this course are as follows:
1. Introduction to financial innovation
 The evolution of risk management products
 Impact of the introduction of the risk management products
2. risk management of derivatives
 Dynamic hedge
 Static hedge
 Risk measures: Value at risk, scenario analysis, standard deviation
3. Analytical tools
 Binomial methods
 Monte carlo simulation method
 Models, estimations, and model risk
4. exotic options (Asian option, lookback option, barrier option, exchange option)
5. swaps revisited (asset swap, equity swap, differential swap, cross-currency
swap)
6. credit risk and credit derivatives
7. Weather, energy, and insurance derivatives
8. volatility derivatives
9. structured notes
10. How to implement risk management in the real world? (invited speaker: senior
risk manager of Fubon bank)
After this course, the students are expected to be able to analyze a complex financial product
such as structure notes. At the end, every student needs to choose one product from the list
(TBA) to make his or her final report.
This syllabus can be downloaded from my website:
http://www.fin.ntu.edu.tw/~slchung/
Grading:
The course grades will be based on the following elements:
Exercises and summarized report
Final report
Presentations and Participations
30%
40%
30%
Topics and Reading lists:
1. Introduction to financial innovation
Smithson, C. W., 1998, Managing Financial Risk, Chap 1 & 3, 3rd Edition, McGraw-Hill
International.
Tufano, P., 2002, Financial Innovation, working paper, Harvard Business School.
2. risk management of derivatives
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 15 & 18, 6th Edition,
Pearson Education.
Smithson, C. W., 1998, Managing Financial Risk, Chap 18 & 19, 3rd Edition, McGrawHill International.
Carr, P., K. Ellis, and V. Gupta, 1998, “Static Hedging of Exotic Options,” Journal of
Finance, 53, 1165-1190.
Derman, E., D. Ergener, and I. Kani, 1995, “Static Options Replication,” Journal of
Derivatives, 2, 78-95
Ju, X., and N. Pearson, Using Value at Risk to Control Risk Taking: How Wrong Can
You Be?, Journal of Risk, 1, 5-36.
3. Analytical tools
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 17, 19, & 24, 6th Edition,
Pearson Education.
4. Exotic options
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 22, 6th Edition, Pearson
Education.
Chung, S. L., 2002, Pricing American Options on Foreign Assets in a Stochastic Interest
Rate Economy, Journal of Financial and Quantitative Analysis, Vol. 37, No. 4, 667-692.
5. Swaps revisited
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 30, 6th Edition, Pearson
Education.
Chang, C. C. and S. L. Chung, 2002, Pricing Asian-Style Interest Rate Swaps, Journal of
Derivatives, Vol. 9, No. 4, 45-55.
Chang, C. C., S. L. Chung, and M. T. Yu, 2002, Valuation and Hedging of Differential
Swaps, Journal of Futures Market, Vol. 22, No. 1, 73-94.
Chung, S. L., and H. F. Yang, 2005, Pricing Quanto Equity Swaps in a Stochastic Interest
Rate Economy, Applied Mathematical Finance, 12(2), 121-146.
Smithson, C. W., 1998, Managing Financial Risk, Chap 9, 3rd Edition, McGraw-Hill
International.
Smith, D. J., 1997, Aggressive Corporate Finance: A Close Look at the Procter and
Gamble – Bankers Trust Leveraged Swap, Journal of Derivatives, 4, 4, 67-79.
6. Credit risk and credit derivatives
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 20 & 21, 6th Edition,
Pearson Education.
Hull, J. C., and A. White, 2004, Valuation of CDO and nth-to-Default Swap without
Monte Carlo Simulation, Journal of Derivatives, 12, 2, 8-23.
7. Weather, energy, and insurance derivatives
Hull, J. C., 2005, Option, Futures, and Other Derivatives, Chap 23, 6th Edition, Pearson
Education.
8. volatility derivatives
handout (PowerPoint file)
Demeterfi, K., E. Derman, M. Kanmal and J. Zou, 1999, A Guide to Volatility and
Variance Swaps, Journal of Derivatives, 6, 4, 9-32.
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