Financial Derivatives

Recommended Prerequisites

Courses units: Financial Products and Markets, Financial Economics and Risk.

Teaching Methods

Theoretical-practical sessions using expositive methods, with audiovisual techniques, where basic concepts are presented and discussed and examples and news from the real markets are presented. Problem solving and practical exercises will also be performed. Students are encouraged to solve problems and exercises as independently as possible. These sessions are complemented with periods of individual tutoring for clarification of doubts.

Learning Outcomes

This curricular unit is characterized as an intermediate level course about derivative assets, traded in organized markets, over financial assets. At the end of the course unit the learner is expected to be able to: (1) know the specific terminology and concepts of this area of finance (1) know the terminology and specific concepts of this area of finance, (2) concisely interpret the publicly available information on derivative assets and their underlying assets, (3) apply the basic methodological tools for the valuation of forward, futures, swaps and options contracts, (4) design and monitor strategies for hedging foreign exchange risk, interest rate risk and equity risk through standard derivative assets; and (5) understand the factors that contribute to the deviation of the transaction price of a derivative asset from its equilibrium theoretical value.

Work Placement(s)

No

Syllabus

I. Introduction
1. Basic concepts on financial derivatives
2. Historical overview of futures and options
3. The underlying assets: stock indices and interest rates
II. Forward and futures contracts
4. Organization and procedures of the futures markets
5. Forward and futures contracts pricing theory: The “cost-of-carry” model
6. Arbitrage in practice
7. Hedging
III. Swaps
8. Interest rate swaps: economic rationality and valuation
9. Currency swaps and currency-interest rate swaps
IV. Options
10. Properties of option prices
11. Composite strategies
12. The binomial option pricing model
13. The Black-Scholes option pricing model
14. Options on stock indices, currencies and futures: valuation, hedging and insurance

Head Lecturer(s)

Hélder Miguel Correia Virtuoso Sebastião

Assessment Methods

Assessment
Research work: 30.0%
Exam: 70.0%

Bibliography

Sebastião, H. "Lessons on Financial Derivatives", [unpublished book]
HULL, John C. — Options, futures and other derivatives. 11th ed.. Upper Saddle River: Pearson Education International, 2021.