Course ObjectiveThe primary objective of this course is to provide students with an
advanced introduction to derivative instruments. By the end of the
course students should have a sound understanding of pricing
concepts, practical applicability, risk management concepts related to
derivatives and implementing such concepts in the programming language
Course ContentIn todays financial world, the role of derivatives gets increasingly
important. Banks and pension funds use derivatives to manage their
balance sheet risk, corporate treasuries need derivatives for mitigation
of international trade risk, insurance companies actively apply
derivatives strategically in order to hedge long term interest rate
exposures. Worldwide derivatives trading has exploded to unprecedented
levels in the last decades. Therefore, a sound understanding of
derivatives is indispensable for anyone pursuing a job in finance.
The course aims to help students in developing a general understanding
of the fundamental principles related to derivative instruments. When we
try to understand derivative instruments we will ask questions like:
1. How do derivative instruments work?
2. Is it possible to decompose derivatives in basic assets?
3. How to determine the fair value of derivative instruments?
4. What are the risks of using derivative instruments?
5. How are derivative instruments applied in practice and are there any
relevant operational issues in the real world?
Hence, the course focuses on facilitating conceptual understanding of
derivative instruments and of the methods that are needed to apply
derivatives in different settings of finance applications; whether it is
for trading purposes, structuring products, risk management, etc.
Applying methods such as e.g. pricing or hedging derivatives to
practical applications knowledge of programming is absolutely necessary.
In separate tutorial sessions we will implement theoretical concepts
discussed in class using VBA to make them available for finance
The field of derivatives is one of the most mathematically sophisticated
in finance. Therefore, to understand derivatives it is inevitable to
deal with mathematical methods. However, we want to emphasize that in
the course mathematical methods are primarily used as tools to
understand derivatives. We intend to serve a balanced mix of theory,
intuition and practical aspects.
The course will treat the following subjects:
- Why derivatives?
- Forwards, futures and options
- Pricing concepts of derivative instruments
- Discrete and continuous time option pricing models
- Understanding Black-Scholes formula
- Beyond Black-Scholes (stochastic volatility and jumps)
- Hedging strategies
- Estimating model parameters
- Credit derivatives / Financial Crisis
Teaching MethodsThe course spans a period of six weeks. There will be 12 lecture
sessions of 2 x 45 minutes each (for dates and times see course
schedule), in which the course material is presented. There will be
additional tutorial sessions in which solutions to programming problems
related to derivatives topics will be discussed. Students need to be
aware that programming is a vital part of this course and will be tested
in the exam as well. To master the programming concepts discussed in
class, it is absolutely crucial to study programming continuously during
the 6 weeks of the course in order to be able to solve the programming
problems in the exam. Furthermore, a guest lecture of a practitioner
handling derivatives in his/her daily business will take place.
Method of AssessmentThe final grade of the course is the grade of the written exam.
The exam will be conducted digitally on computer.
The exam will consist of two parts:
A) a part with open questions and multiple choice questions that have to
be solved in a Word document by occasionally using the equation editor
in Word to type formulas.
B) a programming part where problems need to be solve using the VBA
Entry RequirementsStudents entering this course should be familiar with the basic
corporate finance principles and techniques (e. g. Berk/DeMarzo,
Corporate Finance. 2013) and investment management concepts (e. g.
Bodie, Investments. 2010). In order to follow the course material right
from the start it is recommended to review the derivatives material that
has been covered in the courses: Financiering 2.5 and Investments 3.4.
For solving the assignments, programming experience with Excel/VBA is
required. A very good introduction to Excel/VBA can be found on the
homepage http://xlvu.weebly.com; provided by Dr. Arjen Siegmann.
Furthermore, before the course starts a slides set will be made
available that consists basic material. This material is the starting
point of the lecture and students are required to have mastered such
material to be able to actively use in during the course at all times.
Literature- Lecture slides
- John Hull: Options, Futures and other Derivatives, 8th Edition, 2011
- Das, R.K. and S.R. Sundaram: Dervatives: Principles and Practice,
McGRAW-Hill International Edition, 2010
- Jarrow, R. and A. Chatterjea: An Introduction to Derivative
Securities, Financial Markets, and Risk Management, W. W. Norton &
- Baxter/Rennie: Financial Calculus, Cambridge, 1996. - Neftci:
Principles of Financial Engineering, Elsevier, 2nd edition, 2008.
- Bingham/Kiesel: Risk-Neutral Valuation: Pricing and Hedging of
Financial Derivatives, Springer, 2004.
- Björk, T.: Arbitrage Theory in Continuous Time, Oxford University
|Language of Tuition||English|
|Faculty||School of Business and Economics|
|Course Coordinator||dr. N.J. Seeger|
|Examiner||dr. N.J. Seeger|
dr. N.J. Seeger
You need to register for this course yourself
Last-minute registration is available for this course.
|Teaching Methods||Lecture, Study Group|
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