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DERIVATIVES

Syllabus

EN IT

Learning Objectives

LEARNING OUTCOMES:
The aim of the course is to provide knowledge of all the main contract types of derivatives (forward, future, options, etc.) and skills on pricing, contract evaluation and application. Within the application of derivatives a special concern will be attributed to the hedging strategies, rather than trading and arbitrage. Different hypothesis about the underlying asset will be done, including interest rates, currencies, stock prices and commodities. The structure and the functioning of derivative markets is part of the program too. In the last part of the course an analysis of the Exotic options and the structured products will be done.

KNOWLEDGE AND UNDERSTANDING:
Students will develop knowledge of the main derivatives contract and will understand the different possible applications of derivative products.

APPLYING KNOWLEDGE AND UNDERSTANDING:
Students will be able to choose between different derivatives products when they will be invited to apply them in real (or realistic) scenarios, such hedging and trading.


MAKING JUDGEMENTS:
Students will be able to judge the consequenes of the use of derivatives products in different cases (e.g. portfolio management, corporante risk management, etc.)

COMMUNICATION SKILLS:
Students will learn the glossary of derivatives products and will be able to use it to discuss about derivative products and financial strategies that involve the use of derivatives

LEARNING SKILLS:
Students will be able to assess the pricing and the value of derivatives products.


Prerequisites

Knowledge of shares (definition, characteristics, functioning, pricing logic), bonds (definition, characteristics, functioning, pricing logic), financial mathematics (concept and measurement of the time value, compounding/discounting regimes).

Program

(Week #1 and 2)
1) Introduction to Derivatives (main contract types, the underlying assets, derivatives markets, applications)

2) The Forward:

- definition, main features, application

- Pricing and the hypothesis of no-arbitrage

- The value of the forward contract

(Week #3)
3) The Future:

- definition, main features, application

- Pricing and market value

(Week #4)
4) The Forward Rate Agreement (FRA):

- definition, main features, application

- Pricing and market value

- The market makers and the Double way quote

(Week #5)
5) The Swap

- definition

- The Interest Rate Swap (IRS): main features, application and pricing

- The currency swap

6) The Options

- Definition

- Option call: main features, pay-off and application

- Option put: main features, pay-off and application

- The option pricing (basic elements):

* Intrinsic value and temporal value

* Pricing limit: the maximum and minimum price limits

- Option trading strategies

7) Cap, Floor and Collar

- Cap: main features, pay-off and application

- Floor: main features, pay-off and application

- Collar: main features, pay-off and application

(Week #6)
8) The Exotic Options

- Definition

- Analysis of the main contract types (Boston option, Bermuda option, Forward start option, compound option, as you like it option, barrier option, binary option, look back option, asian option, rainbow option, basket option)

9) The Structured Products

- Definition

- Analysis of the main contract types (Equity linked, reverse convertible, reverse floaters, credit default obligations, etc.)

Books

J.C.Hull, Option, Futures and Other derivatives, Pearson-Prentice Hall (last edition).

Additional materials (e.g. Slides used in class) can be providded during the course and will be available on the webpage of the course.

Bibliography

J.C.Hull, Option, Futures and Other derivatives, Pearson-Prentice Hall (last edition).

Nicolini G. (2012). "Gli strumenti finanziari derivati - Definizioni, caratteristiche ed utilizzi". EIF-e.Book, Venezia - Treviso (ISBN 978–88–96639–14–6).

Teaching methods

The course is made by teaching modules either in presence or on line. Each class is made by 2 academic hours. The use of blackboard and slides represent the main teaching tools used during the course. Students are invited to do exercises out of the class time.

Exam Rules

The assessment is based on a single written test, and the output is a grade on a scale 0-30 (minimum grade to pass the exam 18/30, maximum grade 30/30. There is the chance to include a grade "cum laude" if the grade is 30/30).

The written test includes multiple choice questions, open questions and / or exercises. The duration of the test is variable, depending on the difficulty of the individual parts, in an interval between 90 and 120 minutes.
The student can decide to withdraw until the end of the test. If the student decides to withdraw, he/she can attend the next attempt.

The multiple choice questions allow you to verify the knowledge of financial terminology typical of derivatives, which is necessary for understanding the tools and communicating skills.

Through open questions, the ability to speak, understand and reason about the functioning and possible applications of derivatives is verified. Judgment skills can also be tested.

The exercises are aimed at verifying the knowledge of pricing techniques and the functioning of derivatives, which are essential for an informed use of the instruments.

Criteria for formulating the judgment expressed out of thirty:
- Fail (<18/30): significant deficiencies and/or inaccuracies in knowledge and understanding of the topics; limited analysis and synthesis skills, frequent generalizations.
- 18-20: just minimun knowledge and understanding of the topics with possible imperfections; Sufficient analytical, synthesis and independent judgment skills.
- 21-23: Knowledge and understanding of routine topics; Correct analysis and synthesis skills with coherent logical argumentation.
- 24-26: Fair knowledge and understanding of the topics; good analytical and synthesis skills with rigorously expressed arguments.
- 27-29: Complete knowledge and understanding of the topics; remarkable analytical and synthesis skills. Good independent judgement.
- 30-30L: Excellent level of knowledge and understanding of the topics. Remarkable analytical and synthesis skills and independent judgement. Arguments expressed in an original way.