| CODE | BKF5061 | ||||||||||||
| TITLE | Financial Derivative Investments | ||||||||||||
| UM LEVEL | 05 - Postgraduate Modular Diploma or Degree Course | ||||||||||||
| MQF LEVEL | 7 | ||||||||||||
| ECTS CREDITS | 5 | ||||||||||||
| DEPARTMENT | Banking, Finance and Investments | ||||||||||||
| DESCRIPTION | The study-unit tries to help students attain a basic understanding of financial derivatives; forwards, futures, swaps and options. It uses an integrative graphical ‘building block’ approach that integrates the topics covered into one unified framework. An attempt is made to simply the mathematical content and to emphasize the understanding of the underlying economic concepts. Students are expected to read the study-unit material before coming to the lecture and are encouraged to participate in the lecture with questions and comments. The following topics will be covered during the course. 1) INTRODUCTION The new financial environment Financial price risk. 2) FINANCIAL RISK The risk profile, Tools for managing financial risk. Forward, futures, swap and option contracts. Growth of derivatives. Uses of Derivatives. The Dealers. Regulation, Accounting and Taxation. Risk Management and the value of the Firm. Measuring Financial Price Risk. 3) FORWARD CONTRACTS Structure of a forward contract. Foreign exchange forward contract. Interest Rate Parity, Forward rate agreement (FRA), Using forwards to manage: a) Foreign Exchange risks. b) Interest Rate Risk 4) FUTURES The Futures Contract. Institutional features to reduce Credit Risk. Liquidity. Futures prices. Cost of carry. Expected future spot prices. Using futures to manage: a) An underlying exposure. Basis risk. b) Rolling and cross hedging. 5) SWAPS Evolution of swap contract. Growth of the swap market. Pricing of swaps. Valuing a swap. Using swaps to: a) Reduce funding costs b) Increase Capacity c) Hedge the firm d) Create synthetic instruments 6) OPTIONS The graphics of options. Option valuation. Put-call parity. The Binomial option-pricing model. Using options to hedge: a) Interest rate risk b) Foreign exchange rate risk c) Commodity price risk Learning Outcomes This unit has been designed as an introductory study-unit which seeks to provide students with the basic understanding of financial derivatives. The course aims at explaining what the various derivative instruments consist of, how they are used, why they are used, how they are regulated, and the various differences between them. The course also explains the pricing of such instruments and exercises are given to students so that they can practice the theory. The course also tries as much as possible to simplify the mathematics behind the pricing of these instruments and emphasizes the explanation of the pricing based on the logic rather than mathematical concepts. This is especially important in order to facilitate comprehension, particularly for those students lacking an accounting/mathematical background. Reading List: Main texts - Charles W. Smithson, Clifford W. Smith, Jr., and D. Sykes Wilford, Managing Financial Risk, 1995, Irwin. - John Hull, Options, Futures and other Derivatives, Fourth Edition, 2000, Prentice Hall. |
||||||||||||
| STUDY-UNIT TYPE | Lecture | ||||||||||||
| METHOD OF ASSESSMENT |
|
||||||||||||
| LECTURER/S | |||||||||||||
|
The University makes every effort to ensure that the published Courses Plans, Programmes of Study and Study-Unit information are complete and up-to-date at the time of publication. The University reserves the right to make changes in case errors are detected after publication.
The availability of optional units may be subject to timetabling constraints. Units not attracting a sufficient number of registrations may be withdrawn without notice. It should be noted that all the information in the description above applies to study-units available during the academic year 2024/5. It may be subject to change in subsequent years. |
|||||||||||||