FM322      Half Unit
Derivatives

This information is for the 2024/25 session.

Teacher responsible

Dr Rohit Rahi

Availability

This course is compulsory on the BSc in Finance and BSc in Financial Mathematics and Statistics. This course is available on the BSc in Accounting and Finance, BSc in Econometrics and Mathematical Economics, BSc in Economics, BSc in Mathematics and Economics, BSc in Mathematics, Statistics and Business and Diploma in Accounting and Finance. This course is available with permission as an outside option to students on other programmes where regulations permit and to General Course students.

This course is not capped; any eligible student that requests a place will be given one.

This course does not permit auditing students.

Pre-requisites

Students must have completed Principles of Finance FM212 or FM213. Mathematical Methods (MA100) is recommended but not required. Students who have not taken MA100 or equivalent are advised to do some pre-reading (see "Indicative reading" below). Students who have not taken Principles of Finance (FM212 or FM213), but have an excellent quantitative background, may be allowed to take this course at the discretion of the course leader.

Course content

This course is intended for third-year undergraduates and builds upon FM212/FM213 Principles of Finance. It focuses on derivatives, with a particular emphasis on equity derivatives (standard call and put options, exotic options), futures and forward contracts, and interest rate derivatives (swaps, caps and floors, swaptions). It systematically addresses three basic questions: how do these products work, i.e. what are their payoffs? How can they be used, for hedging purposes or as part of trading strategies? And above all: how are they priced? The course emphasises a small number of powerful ideas: absence of arbitrage, replication, and risk-neutral pricing. These are typically introduced in the context of discrete-time models, but the course also covers some well-known continuous-time models, starting with a comprehensive treatment of the Black-Scholes model. The level of mathematics is appropriate for third-year students with a solid quantitative background.

Teaching

30 hours of lectures in the WT.

This course is taught in the interactive lecturing format. There is no distinction between lectures and classes/seminars; there are “sessions” only, and the pedagogical approach in each session is interactive.

Formative coursework

Exercises will be discussed in class each week. Students will be expected to make positive contributions to class discussion.

Indicative reading

There is no required textbook, but the following is an excellent reference: John C Hull, Options, Futures, and Other Derivatives.

The following pre-reading is recommended for students who have not taken Mathematical Methods (MA100) or equivalent:

 

Martin Anthony and Michele Harvey, Linear Algebra: Concepts and Methods

Chapter 5: Vector Spaces

Chapter 6: Linear Independence, Bases and Dimension



Ken Binmore and Joan Davies, Calculus, Concepts and Methods

Section 5.7: Taylor series for scalar valued functions of n variables

Assessment

Exam (90%, duration: 2 hours, reading time: 15 minutes) in the spring exam period.
Coursework (10%) in the WT.

Key facts

Department: Finance

Total students 2023/24: 132

Average class size 2023/24: 67

Capped 2023/24: No

Value: Half Unit

Guidelines for interpreting course guide information

Course selection videos

Some departments have produced short videos to introduce their courses. Please refer to the course selection videos index page for further information.

Personal development skills

  • Problem solving
  • Application of information skills
  • Application of numeracy skills
  • Commercial awareness