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DRPS : Course Catalogue : Business School : Common Courses (Management School)

Postgraduate Course: Derivatives (CMSE11088)

Course Outline
SchoolBusiness School CollegeCollege of Humanities and Social Science
Course typeStandard AvailabilityNot available to visiting students
Credit level (Normal year taken)SCQF Level 11 (Postgraduate) Credits15
Home subject areaCommon Courses (Management School) Other subject areaNone
Course website None Taught in Gaelic?No
Course description$¨Derivatives&ę is a core elective course for the MSc in Finance and Investment and is part of the financial manager&ęs core body of knowledge and understanding. (For instance, it is a fundamental part of the Chartered Financial Analyst (CFA) charterholder curriculum.) The course aims to provide students with the tools, knowledge and understanding of the derivative product set (i.e. forwards, futures, swaps and options), how the instruments are priced and the markets in which they are traded. The emphasis in the course is on financial management and pricing. To integrate the discussion of these instruments, the course stresses the relationships that exist between derivatives and fundamental financial instruments and, in particular, the important no-arbitrage conditions that underlie the pricing of derivatives. Note that the course does not delve into the more advanced aspects of derivatives valuation such as stochastic processes, although some understanding of this is required. The course will also cover some of the more exotic instruments and securities since these now form an important element in financial markets.

Derivatives, of which futures, options and swaps form the major classes, are key instruments for firms to transfer and mitigate risks and for market participants to take $¨side bets&ę on economic outcomes. Furthermore, the theory of option pricing is one of the key ideas in finance for which Myron Scholes and Robert Merton were awarded the Nobel Prize in economics. Their model for valuing options has been described by the New Scientist as 'the workhorse of the financial services industry'. Financial managers need an understanding of derivative pricing when seeking to address many kinds of problems in finance and how they can be used to modify risks.
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Co-requisites
Prohibited Combinations Other requirements Finance PGs only
Additional Costs None
Course Delivery Information
Delivery period: 2011/12 Semester 2, Available to all students (SV1) WebCT enabled:  Yes Quota:  None
Location Activity Description Weeks Monday Tuesday Wednesday Thursday Friday
No Classes have been defined for this Course
First Class First class information not currently available
Exam Information
Exam Diet Paper Name Hours:Minutes
Main Exam Diet S2 (April/May)Derivatives2:00
Summary of Intended Learning Outcomes

Cognitive Skills:
After completing this course, students should:
* Have a greater understanding of financial market terminology and practice
* Understand the nature of derivatives
* Understand the reasons derivatives exist and how they can be used by practitioners
* Know how arbitrage pricing works and how this sets prices in a competitive market
* Comprehend the idea of replicating portfolios or replicating transactions
* Be knowledgeable about how futures contracts work
* Know how futures are priced in a competitive market
* Be able to price interest rate and cross-currency swaps and have an understanding of the possible variations in the basic types (standard swaps are known as $¨plain vanilla swaps&ę)
* Understand how market users use interest rate and cross-currency swaps to manage risks
* Recognise the nature and types of options in traded markets
* Know option boundary conditions
* Understand key no-arbitrage conditions for the valuation of options
* Comprehend the ways the binomial and Black-Scholes-Merton option pricing models are used to determine the fair value of a simple option
* Know how to make extensions to the basic models to take account of dividends and early exercise
* Have an understanding of embedded options and the techniques required to value securities with option features
* Have an understanding of how exotic options work and be able to price certain types of these
* Know how to use their knowledge of arbitrage pricing methods for options and futures to undertake simple financial engineering


Upon completing this course students should be able to:
* Solve risk management and valuation problems in finance
* Explain the conceptual underpinning to derivatives pricing
* Understand how derivatives are used by financial practitioners
* Price a variety of options using both analytical and numerical methods
* Formulate and explain the rationale behind the current methodologies used to price derivatives
* Predict how changes in the pricing factors will affect the value of derivatives
* Explain how to modify the features of standard options
* Justify the prices at which derivatives are traded in an competitive market
* Price simple options using a calculator


The course will develop the following subject-specific skills:
* The ability to identify and justify the boundary conditions for futures and option prices
* The capability to compute the 'fair value of forward, futures and interest rate and cross-currency swap contracts
* The ability to set up an appropriate replicating strategy or portfolio for derivative instruments, both to price and hedge the transaction
* The capacity to apply the numerical backward induction method used in the binomial option-pricing model to derive the option's 'fair value'
* To know how to extend the basic models for derivatives pricing in special circumstances, including the problem of dividends and early exercise
* The facility to formulate strategies using derivatives and be able to undertake simple financial engineering
* Have additional skill in using a financial calculator to solve numeric problems in finance
* The ability to use a spreadsheet to solve derivative pricing problems
Assessment Information
Assessment and examination. There is no resit examination for students who do not attend the examination at the set date.
Special Arrangements
Additional Information
Academic description Not entered
Syllabus Not entered
Transferable skills Not entered
Reading list Not entered
Study Abroad Not entered
Study Pattern Not entered
KeywordsNot entered
Course organiserDr Peter Moles
Tel: (0131 6)50 3795
Course secretaryMs Natalie Honeyman
Tel: (0131 6)51 1458
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