Derivatives

1.5 Credits · Level: Undergraduate

This course is designed to introduce the students to the theoretical and practical aspects of financial futures, options, and other derivatives. Derivatives have become one of the most important tools of modern finance, from both the academic and the practical standpoint. For example, the global derivatives market has grown to over $600 trillion notional value in total. Financial institutions and institutional investors regularly deal with the trading, valuation, and accounting of derivative securities. The main objective of this course is to help students gain the intuition and skills on how the important derivatives instruments and market work. First, it introduces students to the basic valuation models such as the cost-of-carry model, the binomial tree model, and the Black-Scholes model. Just as the discount cash flow framework allows us to value bonds and stocks (by discounting coupons and dividends), the basic valuation models introduced in this course allow us to arrive at an intrinsic value for a derivative security. Second, we demonstrate how derivative securities can be used to enrich investment strategies and enhance risk management. For example, we discuss the derivatives usage associated with foreign exchange rates used extensively in the setting of international risk management. Third, the course exposes students to the recent developments in the derivatives market, and discusses the characteristics of various innovative derivatives. The basic ideas of financial derivatives can also serve as building blocks to understand a much broader class of valuation issues, such as complex asset portfolios and strategic corporate decisions.