FBE 459

Marshall School of Business Spring 2012
FBE 459
Management of Financial Risk
Hours: T/TH: 12:00-1:50pm HOH 1
Instructor: Professor Mick Swartz
ACC 301b
Ph: 740-6527
Email: [email protected]
Office Hours: TH 10am- 11:50am, Monday 10am-noon, after class, or
by appointment (NOTE: this schedule is up to 11/20;
after that, only by appointment).
Course Objective: This course intends to be an introduction to
financial derivatives, namely options, futures and
swaps. The goal is to provide a complete overview
of the main characteristics of these securities and
pricing and hedging issues, from the point of view
of the investment bank or large investor (rather than
from the point of view of the small investor). The
emphasis of the course will be on conceptual issues
as opposed to the institutional aspects (although the
basic institutional aspects will be covered). By all
standards this is a quantitative class and a good
background in calculus and statistics is highly
desirable, if not necessary.
Grading: The grade will be based on class participation, two
midterm exams, a project/presentation.
Midterm One: 33%
Midterm Two: 33%
Written Group Project: 23%
Group Presentation: 11%
Problems will be assigned on a regular basis and
discussed in class (at least the most representative)
but not collected. However, class participation will
also include solving problems in class. Working
groups will be established for this purpose.
Exam Dates:
Midterm One: Thursday
Midterm Two: TBA Dec.
Project Due: Thursday
Presentations: Nov 29,
Sept 27
12 Finals Week
Nov 29
Dec 4, Dec 6 depending on group signup.
The Project is a 5-10 page paper discussing the management of a portfolio.
Hedging an equity portfolio, hedging a fixed income portfolio, hedging a
commodity, hedging a currency, speculating with equities, speculating with
commodities, speculating with currencies and fixed income portfolios. The
portfolio is a group project thru stocktrak, using real time prices on
securities throughout the world.
Grade Announcements: One week after the midterm, grades will
be posted. Three working days (72 hours) after the
grades are posted, the posted grades become final
and no claims on them will be considered.
Required Text: Hull, CUSTOM edition,
Prentice Hall.
Recommended Readings: Wall Street Journal. Bloomberg, Reuters, CNBC media.
http://www.cboe.com and cme, cbot, nadex
Additional Books: Cox and Rubinstein, Options Markets, Prentice
Jarrow and Turnbull, Derivative Securities, 2e,
McDonald, Derivatives Markets, Addison-Wesley.
Siegel and Siegel, The Futures Markets: Arbitrage,
Risk Management and Portfolio Strategies, Probus
Each lecture represents half a class period.
Week One
Lecture 1: Introduction.
· Course overview.
· Financial Risk
· Derivatives.
Lecture 2: Introduction.
· Different options.
· Institutional aspects: margins.
· Payoff diagrams.
· H: 8.
Week Two
Lecture 3-4: Arbitrage Pricing.
· Determinants of prices.
· Put-call parity.
· Price boundaries.
· H: 9.
Week Three
Lecture 5-6: Trading Strategies.
· One stock and one option.
· Spreads.
· Combinations.
· H: 10.
Week Four
Lecture 7-8: Binomial Pricing Model.
· Single-period.
· Multi-period.
· Pricing of American options.
· H: 11.
Week Five
Lecture 9-10: Black and Scholes mathematical foundations.
· Uncertainty.
· Continuous Time processes.
· Ito’s Lemma.
· H: 12-13.
Week Six
Lecture 11-12: Black and Scholes formula.
· Assumptions of the BS formula.
· Implicit volatilities.
· Extensions to the BS formula.
· H: 12-13.
Week 7
Lecture 10: Midterm September 27th
Week Eight
Lecture 13: Hedging options.
· Concept
· Delta-hedging
· Greeks
· H: 15.
Week Nine
Lecture 15: Hedging portfolios.
· With options
· Portfolio insurance
· Value at Risk.
· H: 15, 18.
Lecture 16: Numerical Issues.
· Estimating volatilities
· Numerical valuation methods
· Quasi-analytic valuations
· H: 16-17, 19.
Week Ten
Lecture 17-18: Options on dividend-paying underlying.
· Dividend-paying stock
· Options on Stock Indices
· Currency options
· H: 14.
Week Eleven
Lecture 19: Exotic Options.
· Compound options
· Barrier options
· Lookback options
· H: 22.
Week Twelve
Lecture 20-21: Interest Rate Derivatives.
· Bond options
· Interest rate models
· Valuation issues
· H: 26, 28-29.
Week Twelve, continued
Lecture 22-23: Interest Rate Swaps.
· “Plain vanilla” swaps
· Empirical issues
· Swap valuation
· H: 7, 30.
Week Thirteen
Lecture 24-25: Introduction. Pricing of Futures and Hedging with Futures.
· Forward and future contracts
· Marking to market
· Institutional aspects
Week Fourteen
· Determination of forward price
· Normal backwardation and contango
· Index arbitrage
· Crosshedging and hedging ratios
· H: 2,3,5 and 14.
Lecture 27: Pricing of Futures, Hedging with Futures. Lessons in Derivatives.
· Some futures contracts
· Options on futures
· H: 3,5,14, 32.
Week Fifteen
Nov 29th (Lectures 27,28,29): Projects Due and Group Presentations (powerpoint
slides due on day you present prior to your presentation).
Final Exam – TBA Dec. 12
Academic Dishonesty: The use of unauthorized material, communication
with fellow students during an examination,
attempting to benefit from the work of another
student, and similar behavior that defeats the intent
of an examination, or other class work is
unacceptable to the University. It is often difficult
to distinguish between a culpable act and
inadvertent behavior resulting from the nervous
tensions accompanying examinations. Where a clear
violation has occurred, however, the instructor may
disqualify the student’s work as unacceptable and
assign a failing mark on the paper.
Disability: Any student requesting academic accommodations
based on a disability is required to register with
Disability Services and Programs (DSP) each
semester. A letter of verification for approved
accommodations can be obtained from DSP. Please
be sure the letter is delivered to me (or my TA) as
early in the semester as possible. DSP is located in
STU 301 and is open 8:30 a.m. – 5:00 p.m.,
Monday through Friday. The phone number for
DSP is (213) 740-0776.