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DRPS : Course Catalogue : Business School : Business Studies

Undergraduate Course: Futures and Options (BUST10023)

Course Outline
SchoolBusiness School CollegeCollege of Arts, Humanities and Social Sciences
Credit level (Normal year taken)SCQF Level 10 (Year 3 Undergraduate) AvailabilityAvailable to all students
SCQF Credits20 ECTS Credits10
SummaryThe 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.
Course description 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.

Outline Content

Introduction to Futures and Options
Forward and Futures Prices and Using Futures
Commodity Futures
Swaps 1: Pricing
Swaps 2: Application
Introduction to Options and Option Strategies
Pricing Options
Extending the Models to Indices, Currencies and Futures
The Greeks of Option Pricing:
Exotic Options

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.
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Students MUST have passed: Principles of Finance (BUST08003) OR Introduction to Corporate Finance (BUST08030)
Prohibited Combinations Other requirements None
Information for Visiting Students
Pre-requisitesVisiting 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? Yes
Course Delivery Information
Academic year 2024/25, Available to all students (SV1) Quota:  None
Course Start Semester 1
Timetable Timetable
Learning and Teaching activities (Further Info) Total Hours: 200 ( Lecture Hours 20, Summative Assessment Hours 2, Programme Level Learning and Teaching Hours 4, Directed Learning and Independent Learning Hours 174 )
Assessment (Further Info) Written Exam 60 %, Coursework 40 %, Practical Exam 0 %
Additional Information (Assessment) 60% Written Exam (Individual) - 2 hours - Assesses all course Learning Outcomes.

40% Essay (Individual) - 1500 words - Assesses course Learning Outcomes 1,2,3.
Feedback Formative: Feedback will be provided throughout the course.

Summative: Feedback will be provided on assessments within agreed deadlines.
Exam Information
Exam Diet Paper Name Hours & Minutes
Main Exam Diet S1 (December)2:00
Learning Outcomes
On completion of this course, the student will be able to:
  1. Understand and discuss the nature of derivatives and the specialised terminology of financial markets.
  2. Understand and discuss how arbitrage pricing works and how this sets prices in a competitive market.
  3. Understand and discuss how futures contracts work and how forward and futures contracts are priced in a competitive market.
  4. 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.
  5. 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.
Reading List
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
Additional Information
Graduate Attributes and Skills Communication, ICT, and Numeracy Skills

After completing this course, students should be able to:

Convey meaning and message through a wide range of communication tools, including digital technology and social media; to understand how to use these tools to communicate in ways that sustain positive and responsible relationships.

Knowledge and Understanding

After completing this course, students should be able to:

Demonstrate a thorough knowledge and understanding of contemporary organisational disciplines; comprehend the role of business within the contemporary world; and critically evaluate and synthesise primary and secondary research and sources of evidence in order to make, and present, well informed and transparent organisation-related decisions, which have a positive global impact.

Identify, define and analyse theoretical and applied business and management problems, and develop approaches, informed by an understanding of appropriate quantitative and/or qualitative techniques, to explore
and solve them responsibly.
Course organiserDr Peter Moles
Tel: (0131 6)50 3795
Course secretaryMiss Aoife McDonald
Tel: (0131 6)50 8074
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