BMA5307: Options and Futures
Semester 2 – Course Syllabus
Instructor: Keshab Shrestha
Email: rmikms@nus.edu.sg
Section: Fridays 6:00 – 9:00PM
Venue: Seminar Room 3-4, Mochtar Riady Building, Storey 3
Office Hours: TBA
Room: TBA
Tel: 6601-1064
Description:
This course will cover various types of derivative securities including forward, futures,
options, swaps, swaptions and credit derivatives etc. We would cover, in detail, the
valuation of these derivative securities using Binomial Lattice (Binomial Tree) approach
so that you can fully appreciate the fundamental intuition involved in valuation of
derivative securities. This will help you to value existing derivative securities as well as
those securities which are yet to appear in the market. Time permitting; we will also
cover derivative valuation using simulation method.
The course will also cover various applications of derivative securities in managing
various types of risks faced by corporations, non-profit institutions as well as sovereign
entities. The discussion will cover the management and hedging of currency risks,
interest rate risks, commodity price risks as well as credit risks including the use of stock
index futures in changing CAPM beta and the use of bond futures in changing the
duration of liabilities or bond portfolios.
The course is expected to be fairly quantitative. We would be making heavy use of
Excel as an important analytical tool including the VBA macros. The materials contained
in the textbook will be supplemented by lecture notes.
In this course, we will specifically study the following topics in various levels of depth
 Derivatives markets
… limited general overview.
 Derivatives pricing
… in-depth coverage of several important topics.
 Derivatives applications … in-depth look at specific applications.
By the end of this course, you should be able to:
 Evaluate the various risks associated with the derivatives
 Make use of different types of derivatives to manage risks
 Value many different derivatives including equity and interest rate derivatives
1
Pre-requisites: BMA5008 (Financial Management)
Class Format
Classes will be conducted in a mix format that would encompass lectures and case studies.
All lecture notes and announcements will be available on IVLE. Since the lectures would
make extensive use of Excel, I encourage you to bring your Laptop to the class.
Homework Assignments
Please note that only some of the assignments will be graded. But, all
assignments will be discussed in class (selected questions only). Homework
assignments are due will be indicated in the assignments themselves. Late submissions will
NOT be accepted
Required Textbook
John C. Hull, Options, Futures and Other Derivatives, 8th Edition (2012) (JH).
References
Don Chance, An Introduction to Derivatives and Risk Management, Harcourt College
Publishers, 5th Edition, 2001.
Robert Jarrow and Stuart Turnbull, Derivative Securities, South Western College
Publishing, 2nd Edition, 2000.
Frank J. Fabozzi, Bond Markets, Analysis and Strategies, 8th Edition, 2013, Pearson (FF).
2
Course Assessment
Class Participation:
Case Projects:
Quizzes (date to be announced):
Homework:
Open-Book Final Examination:
10%
20%
10%
20%
40%
Class Schedule
Topic
Readings
1
Introduction to Derivatives
JH Ch. 1
2
Futures: Valuations
JH Ch. 5
3
Interest Rate Futures & Swaps
JH Ch. 6, 7
4
Introduction to Options
JH Ch. 9 & 10
5
Option Trading Strategies
JH Ch. 11
6
Option Pricing: The Binomial Lattice Model
JH Ch. 12
7
Option Pricing: The Black-Scholes-Merton Model
JH Ch. 13, 14
8
Option on Indices, Currencies and Futures
JH Ch. 16, 17
9
11
Interest Rate Derivative Pricing: Binomial Lattice
Notess
Approach
Valuation of Callable Bonds, Putable Bonds,
Notes
Swaps, Swaptions, Floors and Caps
Credit Risk and Credit Derivatives
JH Ch. 23, 24
12
Case Presentation
10
3