APPLIED MATHEMATICS

Course Credits: 3 Units

Prerequisites: Math 162 (Theory of Interest)

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MATH 165 - Financial Derivatives Markets

Course Description

This 3-unit course is an introduction to futures, options and other related securities with emphasis on arbitrage pricing and risk management. It will give you a deeper grasp of financial mathematics through an understanding of concepts, trading processes and strategies and other practices in derivatives markets.

Course Learning Outcomes

After completion of the course, the student should be able to:

  1. Explain the features of basic types of derivative securities and their interpretations
  2. Discuss the concepts of hedging, arbitrage, and management of financial risks
  3. Discuss the put-call parity and others pricing relations between calls and puts using no-arbitrage principle
  4. Formulate hedging, arbitrage, and speculative strategies
  5. Apply suitable pricing models to price forwards, futures and options
  6. Engage in problem solving using appropriate derivatives concepts, models and tools learned
Course Outline

UNIT 1. Introduction to Financial Derivatives

  1. What is a Derivative?
  2. An Overview of the Financial Markets
  3. Role of Financial Markets and Derivatives
  4. Buying and Short-selling of Financial Assets

UNIT 2. Introduction to Forwards and Options

  1. An introduction to Forwards and Options
  2. Call Options
  3. Put Options
  4. Summary of Forwards and Option Positions

UNIT 3. Insurance, Collars and Other Strategies

  1. Basic Insurance Strategies
  2. Put-Call Parity
  3. Spreads and Collars
  4. Speculating on Volatility

UNIT 4. Introduction to Risk Management

  1. Basic Risk Management: The Producers Perspective
  2. Basic Risk Management: The Buyer's Perspective
  3. Why do Firms Manage Risk
  4. Selecting the Hedge Ratio

UNIT 5. Financial Forwards and Futures

  1. Alternative Ways to Buy a Stock
  2. Prepaid Forwards Contracts on Stock
  3. Forward Contracts on Stock
  4. Futures Contracts
  5. Uses of Index Futures
  6. Currency Contracts
  7. Eurodollar Futures

UNIT 6. Commodity Forwards and Futures

  1. Introduction to Commodity
  2. Equilibrium Pricing of Commodity Forwards
  3. Pricing Commodity Forwards by Arbitrage: An Example
  4. Gold Futures
  5. Seasonality: The Corn Forward Market
  6. Energy Markets
  7. Hedging Strategies
  8. Synthetic Commodities

UNIT 7. Parity and Other Option Relationships

  1. Put-Call parity
  2. Generalized Parity and Exchange Options
  3. Comparing Options with respect to Style and strike

UNIT 8. Binomial Option Pricing

  1. One-Period Binomial Tree
  2. Two or more periods Binomial Tree
  3. Put Options
  4. American Options
  5. Options and Other Assets