FNCE90011 / FNCE90020 DERIVATIVE SECURITIES

SUBJECT GUIDE
Semester 1, 2012

Prepared by Associate Professor John Handley

Department of Finance Faculty of Business and Economics

Subject Overview
Welcome to FNCE90011 / FNCE90020 Derivative Securities. This subject covers derivative markets and derivative securities. It discusses pricing, risk management and regulatory aspects of derivative securities. Topics include: forwards and futures markets, options markets, arbitrage and trading securities, basic pricing concepts, the cost-of-carry model, the BlackScholes model, hedging and risk management techniques.

Prerequisites
The subject FNCE90011 is only available to students enrolled in the Postgraduate Diploma in Finance, the Master of Finance (or the Master of Financial Management), and for students in the Master of Management who have successfully completed FNCE90018 Corporate Financial Policy and FNCE90056 Investment Management. The subject FNCE90020 is only available to those students that would satisfy the entry criteria for the Master of Applied Finance

Learning Outcomes
Objectives On successful completion of this subject students should be able to: Explain factors affecting option prices, including volatility and dividends; Calculate arbitrage bounds; Devise trading strategies for options; Explain the impact of dividends on option pricing; Use the Black-Scholes model for option pricing; Calculate and use hedge parameters in option pricing.

Generic Skills On successful completion of this subject, students should have improved the following generic skills: Oral communication Written communication Collaborative learning Problem solving Team work Statistical reasoning Application of theory to practice Interpretation and analysis Critical thinking Synthesis of data and other information Using computer software

Contact Details
Lecturers

Name Associate Professor John Handley

Room 12.052, The Spot

Phone 8344 7663

Email handleyj@unimelb.edu.au

Office Hours By Appointment

I am available for consultation each week of semester just send me an email to make an appointment.

Email Protocol While academic staff endeavor to address queries received via email, it is more appropriate to resolve substantive questions face-to-face during normal consultation hours. With this in mind, we encourage all students to familiarize themselves with the consultation hours offered by lecturers in this subject. Please note that we are only able to respond to student emails coming from a University email address. Please do not use personal email addresses such as Gmail, Yahoo, Hotmail or even business email addresses. Emails from non-University email addresses may be filtered by the Universitys spam filter, which means that we may not receive your email. All correspondence relating to this subject will only be sent to your University email address. Note that you must first activate your University email address before you can send or receive emails at that address. You can activate your email account at this link: http://accounts.unimelb.edu.au/.

Classes

Class Times There is one 3-hour class per week. There are two streams for this subject a day stream and a night stream. Both streams will be run at the same pace. This means that if you normally attend the day (night) stream but cannot make it in a particular week, then you are welcome to attend the class in the night (day) stream of that week. Classes for the day stream are on Mondays from 9.00am 12.00pm in Theatre 3, ICT Building. Classes for the night stream are on Mondays from 6.15pm 9.15pm in Theatre 3, ICT Building.

Class Schedule

WEEK

DATE

STAFF

TOPIC

Reference to Hull (2011) 7th edition Chapter 1, 4.2, 5.2-5.3, 9, 11 Chapter 10 Chapter 12 and 18.1 Chapter 12 and 18.1 Chapter 13.1 13.9, 19.1 19.3 Chapter 13.10, 15.1-15.4, 18.3 -

Reference to Hull (2008) 6th edition Chapter 1, 4.2, 5.2-5.3, 8, 10 Chapter 9 Chapter 11 and 16.1 Chapter 11 and 16.1 Chapter 12.1 12.9, 17.1 17.3 Chapter 12.10, 13.1-13.4, 16.3 -

Reference to Hull (2005) 5th edition Chapter 1, 4.2, 5.2-5.3, 8, 10 Chapter 9 Chapter 11 and 16.1 Chapter 11 and 16.1 Chapter 12.1 12.8, 17.2 17.4 Chapter 12.9, 13.1-13.4, 16.3 -

Feb 27

JH

Fundamentals

2 3

Mar 5 Mar 12

JH JH

Arbitrage Bounds The Binomial Model (Part I) The Binomial Model (Part II) The BlackScholes Model Dividends

Mar 19

JH

Mar 26

JH

Apr 2

JH

Apr 9

No class Easter Non-teaching Period The Greeks Forwards and Futures Hedging (Part I)

8 9

Apr 16 Apr 23

JH JH

Chapter 17 Chapter 2.11, 5 (ex 5.14) Chapter 2.3, 3, 5.14 Chapter 2.3, 3, 5.14 Chapter 7 (ex 7.8-7.9), 23.1 Chapter 15.5, 16

Chapter 15 Chapter 2.10, 5 (ex 5.14) Chapter 2.3, 3, 5.14 Chapter 2.3, 3, 5.14 Chapter 7 (ex 7.8-7.9), 21.1 Chapter 13.5, 14

Chapter 15 Chapter 2.10, 5 (ex 5.14) Chapter 2.3, 3, 5.14 Chapter 2.3, 3, 5.14 Chapter 7 (ex 7.8-7.9), 21.1 Chapter 13.5, 14

10

Apr 30

JH

11

May 7

JH

Hedging (Part II)

12

May 14

JH

Swaps

13

May 21

JH

Options on Currencies, Forwards and Futures

Class Materials Printed copies of Class Slides and Exercise Sets will be handed out for the first class only. Thereafter, copies of Class Slides, Exercise Sets and Important Notices will be available from the subject website on the LMS at http:/lms.unimelb.edu.au. To avoid the unnecessary duplication of the posting of materials, all students (i.e. whether enrolled in FNCE90011 or FNCE90020) should download materials from the FNCE90011 subject website.

Prescribed Text The prescribed text is John C Hull, Fundamentals of Futures and Options Markets, 7th edition, 2011, Pearson Education Inc. Alternatively, you may use the earlier 5th or 6th edition.

Assessment
A 3-hour end-of-semester examination (70%) and assignments totaling no more than 3000 words (30%). Further details of the exam and assignments will be handed out at a later date.

Other Matters

Teaching & Learning Unit (TLU) The TLU mission is to improve the student learning experience in the Faculty of Business and Economics. They offer a wide range of support and learning services to students. Further information can be accessed at: http://www.tlu.fbe.unimelb.edu.au/ You are encouraged to make use of the Teaching and Learning Unit. It is there to help.

The Assignment Submission Tool The Assignment Submission Tool allows students to submit their assignments online. Your lecturer will let you know whether you will be required to use the Assignment Submission Tool during the semester. In this case, you will be able to access the Assignment Submission Tool via the subject website on the LMS.

Academic Honesty Academic honesty is a core value of the University of Melbourne. Presenting material from other sources without full acknowledgement (referred to as plagiarism) is heavily penalised. Penalties for plagiarism can include a mark of zero for the piece of assessment or a fail grade for the subject. Plagiarism is the presentation by a student of an assignment identified as his or her own work even though it has been copied in whole or in part from another students work, or from any other source (eg. published books, web-based materials or periodicals), without due acknowledgement in the text. Collusion is the presentation by a student of an assignment as his or her own work when it is, in fact, the result (in whole or in part) of unauthorised collaboration with another person or persons. Both the student presenting the assignment and the student(s) willingly supplying unauthorised material are considered participants in the act of academic misconduct. The TLU has developed a web-based Academic Honesty Module that explains the main elements of academic honesty and allows you to self-test your knowledge of honest academic practices. You are strongly encouraged to complete this module, which can be accessed at: http://www.tlu.fbe.unimelb.edu.au/AcademicHonestyTest/index.cfm/

Special Consideration Students who have been significantly affected by illness or other serious circumstances during the semester may be eligible to apply for Special Consideration. The following website contains detailed information relating to who can apply for Special Consideration and the process for making an application: http://www.fbe.unimelb.edu.au/students/special/

Calculator Policy As a general rule, any calculator that can be programmed and/or that can display a graph and/or that has a full alphabetic keyboard will not be permitted in any examination in this subject. It is the responsibility of each student to ensure that the calculator they take into an examination complies with this rule. If any student in an examination is found in possession of a non-complying calculator, the calculator will be confiscated for the period of the examination. Note that it is not sufficient merely to switch off a calculators programming capacity. In addition, the student will be in breach of university regulations governing examinations, the penalties for which may include: exclusion from the university, either permanently or temporarily; imposition of a fine; deprivation of credit for the subject or for a component of assessment of the subject; termination of enrolment.

Standardisation Policy The final mark for this subject may be adjusted in accordance with the Facultys standardisation guidelines.