Finance 6470: Derivatives Markets

Spring Semester, 2017

Course Information

• Course Dates: January 9 - April 28
• Course Time: TR
• Course Room: HH 170
• Lecture:
• Course Canvas

Instructor Information

• Tyler J. Brough
• Office Hours: TBD & by appt.
• Office: BUS 605
• Phone: 435-797-2369 (nb: I check slack before voice mail)
• Email: tyler dot brough at aggiemail dot usu dot edu

Syllabus

Course Description

This course covers the economics of futures, futures, options, and swaps. By the end of the course, you will have a solid knowledge of how these products work, how they are used, how they are priced, how financial institutions trade them to hedge and speculate, as well as of the markets in which they trade. The single biggest idea from this class is arbitrage. We will discuss the concept of arbitrage deeply as it applies to financial derivatives, but also as it applies much more broadly.

Course Objectives

• Learn fundamental principles and theories
  • Learn what derivatives are and their basic vocabulary
  • Learn how derivatives markets work and the institutional features of the markets in which they trade
  • Learn the principles of modern financial economic theory explaining how derivative securities are priced
• Learning to apply course materials
  • Learn a framework for corporations, individuals and other organizations to determine how and when to use derivative securities for hedging and speculation
  • Learn to implement derivative pricing models for applications in hedging and speculation
• Developing specific skills, competencies and points of view needed by professionals in the finance industry and in academic finance
  • Use basic programming such as Python, R, or VBA Excel for the purposes of financial modeling

Huntsman School Pillars

This course aligns with the Huntsman School Pillars along the dimension of analytical rigor. In addition, we will be able to discuss the financial crisis and the role that derivatives played in that saga. As such ethical leadership will touched upon. Financial derivatives are perhaps the fastest growing products in any market. The entrepreneurial spirit comes strongly into play. Finally, a global vision is required to understand modern derivatives markets as the trading markets continue to become more and more global.

Textbooks

There is only one required textbook for this course:

• Derivatives Markets 3rd Edition by Robert McDonald.

I will also use some other books for some lecture material. Some of these other books are the following:

• Options, Futures, and Other Derivatives 9th Edition by John Hull (sometimes called the bible of option pricing)

• Risk Transfer by Christopher Culp (a gem of a book with a fresh perspective)

• The Economic Function of Futures Markets by Jeffrey Williams (entirely mind-bending perspective)

There will also be several assigned academic journal articles, which I will post on the course Google Drive.

Assessment

The grade that you will earn will be determined by your ranking in the class based on the weighted total points accumulated on class preparation and participation, as well as on exams. There is not predetermined percentage of the class that will get an A or that will fail. If you all do excellent work, you will all earn exceptional grades. The weights given to each part of the class are as follows:

• Class Preparation, Participation, and Homework (30%) - I expect each student to come prepared for each class session. Preparation includes completing the assigned readings, writing down questions for section of the reading that were not fully understood or internalized, and completing homework assignments. Class participation is crucial for understanding. I will call on students in class. There are always two good answers based on your preparation. The first correct response is an informed answer based on your preparation. The second correct response is a question that shows that you have wrestled with the material in your preparations. A good question often lays the foundation for a more complete understanding. One important aspect of class participation is the professionalism with which you conduct yourself. I will drop your lowest homework assignment and replace it with the average of the others, BUT only if I deem it of sufficient quality and effort.

• Midterm Exam (35%) - The midterm will be a tradition in-class exam. You are allowed a single sheet of notes for the exam.

• Final Exam (35%) - The final exam will a take-home final exam. We will discuss it more later.

Topics (Subject to Change)

We will cover three broad modules:

• Module I: Economic Foundations: Arbitrage concepts, The Law of One Price, Equilibrium concepts

• Module II: Forwards, Futures, and Swaps (hedging, speculation, trading)

• Module III: Options and dynamic trading

Import dates:

• Feb 21 - Monday Schedule
• Mar 6 - 10 - Spring break
• Apr 28 - Last day of classes
• May 1-5 - Final exams