Financial Derivatives

Recommended Prerequisites

Basic knowledge on valuation methodologies and investment strategies in stock and interest rate markets.

Teaching Methods

Teaching methods: Theoretical-practical lectures based on expositive and interactive methods and through the use of audiovisual techniques. In these lectures students also carry out individual practical works and group discussion of problems in a real world framework. The theoretical-practical lectures are complemented with office hours for individual attendance.

Learning Outcomes

This is an introductory-medium level course on exchange-traded derivatives on financial assets. This course aims to provide an overview of the terminology and concepts particular to this field of finance and to develop basilar abilities to valuate derivatives and to use them as hedging devices. Therefore, students should be able to:

- Understand public information on financial derivatives and on their underlying assets.

- Apply basic pricing methodologies to forward, futures, swaps and options contracts.

- Design and evaluate derivatives strategies to hedge currency, interest rate and stock risks. 

- Identify real world variables that drive away transaction prices of derivatives from their equilibrium values.

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

Continuous Assessment
Exam: 50.0%
Alternatively: Mixed Regime: A – 2 Works in group (25% each): 50.0%

Final Assessment
Exam: 100.0%

Bibliography

HULL, John C. — Options, futures and other derivatives. 5th ed.. Upper Saddle River : Prentice-Hall/Pearson Education International, 2003. [BP 336.76 HUL]
SEBASTIÃO, Helder — Lições de instrumentos financeiros derivados.