Undergraduate Course: Futures and Options (BUST10023)
||College||College of Arts, Humanities and Social Sciences
|Credit level (Normal year taken)||SCQF Level 10 (Year 3 Undergraduate)
||Availability||Available to all students
|Summary||The course covers the market structure, use and pricing of futures and options, two key elements of financial markets. Both allow users to modify and transfer risks, take speculative positions, and develop investment strategies and the markets in which they are traded are significant elements of most advanced economies. Key questions as to their applications and pricing form a specialist area in finance. In particular, options involve the development of complex models for, pricing and monitoring their behaviour. A sub-element of the course will examine the use and pricing of interest rate and cross-currency swaps.
The Honours course Futures and Options is part of the suite of honours courses offered by the Business School in finance. It is normally taken in the third year of study of the MA degree at the University of Edinburgh, and is part of the finance progression stream. The course aims to provide students with the tools, knowledge and understanding of the derivative product set (that is, forward contracts, futures, swaps and options), how the instruments are priced, and the markets in which they are traded. The emphasis is on financial management and pricing. To integrate the discussion of these instruments, the course stresses the relationships that exist between the different instruments and, in particular, the various no-arbitrage and replication conditions that underlie the fair pricing of derivatives. Note that the course does not delve into the more advanced aspects of derivatives pricing such as stochastic processes, although some understanding of this is required.
Introduction to Futures and Options
Forward and Futures Prices and Using Futures
Swaps 1: Pricing
Swaps 2: Application
Introduction to Options and Option Strategies
Extending the Models to Indices, Currencies and Futures
The Greeks of Option Pricing:
Student Learning Experience
Futures and Options is structured around the class programme supported by selected readings from the set text with some additional reference material.
Outside of the formal class programme, students are expected to undertake additional self-study using the textbook by reading at least the recommended sections and other suggested references, including watching recommended videos. This will allow students to reinforce and expand on material introduced in the lectures.
The assignment requires students to examine a particular aspect of the instruments being studied on the course with a view to developing a deeper understanding of the issues and processes involved. In delivering the assignment, students are required to identify, assess, evaluate, understand, and integrate material from a variety of sources and summarise it in a coherent and logical form.
Information for Visiting Students
|Pre-requisites||Visiting students must have at least 4 Business courses at grade B or above. This MUST INCLUDE one course equivalent to BUST08003 Principles of Finance. This course cannot be taken alongside BUST08003 Principles of Finance or BUST08030 Introduction to Corporate Finance. We will only consider University/College level courses.
|High Demand Course?
Course Delivery Information
|Academic year 2020/21, Available to all students (SV1)
|Learning and Teaching activities (Further Info)
Lecture Hours 20,
Summative Assessment Hours 2,
Programme Level Learning and Teaching Hours 4,
Directed Learning and Independent Learning Hours
|Assessment (Further Info)
|Additional Information (Assessment)
||This will be a mixture of examination and assignment.
The assignment is worth 40% of the course mark and takes the form of an individual essay (max 1500 words).
The examination represents 60% of course marks.
||Feedback on your coursework, together with individual marks, will be available on Learn 15 working days from the submission date.
Your examination marks will be posted on Learn (together with generic feedback and examination statistics) as soon as possible after the Boards of Examiners' meeting (normally early-mid June). During the summer months (i.e. mid/end June - end August), you may come to the Business School Undergraduate Reception (outside Room 1.11, Business School, 29 Buccleuch Place) to look at your examination scripts. Note that you will not be able to remove any examination scripts from the UG Office as they may be required by the Board of Examiners.
||Hours & Minutes
|Main Exam Diet S2 (April/May)||Futures and Options||3:00|
On completion of this course, the student will be able to:
- Understand and discuss the nature of derivatives and the specialised terminology of financial markets.
- Understand and discuss how arbitrage pricing works and how this sets prices in a competitive market.
- Understand and discuss how futures contracts work and how forward and futures contracts are priced in a competitive market.
- Understand and discuss the pricing of interest rate and cross-currency swaps and understand how market users make use of swaps for asset-liability management.
- Understand and discuss the different types of options and their characteristics and payoffs, how the boundary conditions for option prices are determined and how the binomial and the Black-Scholes-Merton option pricing models are used to determine the fair value of a simple option.
|John C. Hull, Options, Futures, & Other Derivatives, 8e, Prentice Hall International Edition, 2012. (Hull)|
Students may also wish to consult:
Robert W. Kolb and James A. Overdahl, Futures, Options and Swaps, Blackwell Publishing 5/e (Kolb)
[Kolb and Overdahl (Kolb) provides a much more detailed step-by-step approach to some of the material than is given in Hull and hence is a good complement to the course text. References to this recommended textbook are also given in the course outline.]
A very good book of short essays on all aspects of derivatives, which is highly recommended for giving a straightforward and intuitive understanding of many of the issues discussed on the course is:
Don Chance, Essays in Derivatives, Wiley Finance
|Graduate Attributes and Skills
Upon completing this course students should be able to:
Solve risk management and valuation problems in finance
Work out the fair price of forward contracts, futures, and interest rate and cross-currency swaps
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 their pricing factors will affect the value of derivatives
Justify the prices at which derivatives are traded in an efficient market
Price simple options using a calculator
Subject Specific Skills
The course will develop the following subject-specific skills:
The ability to identify and justify the boundary conditions for futures and option prices
The ability to compute the 'fair price' of a futures contract
The ability to set up an appropriate replicating strategy or portfolio for derivative instruments
The ability to apply the numerical backward induction method used in the binomial option-pricing model to derive the option's 'fair value'
The knowledge as to how to extend the basic models in special circumstances, including the problem of dividends, early exercise and embedded options
The ability to formulate strategies using derivatives and be able to undertake simple financial engineering exercises
The ability to use a financial calculator to solve numeric problems in finance
|Course organiser||Dr Peter Moles
Tel: (0131 6)50 3795
|Course secretary||Miss Jen Wood
Tel: (0131 6)50 8335