### General Information

Course Code | E_FIN_DER |
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Credits | 6 EC |

Period | P4 |

Course Level | 400 |

Language of Tuition | English |

Faculty | School of Business and Economics |

Course Coordinator | dr. N.J. Seeger |

Examiner | dr. N.J. Seeger |

Teaching Staff |
dr. N.J. Seeger |

### Practical Information

You need to register for this course yourself

Last-minute registration is available for this course.

Teaching Methods | Lecture, Study Group, Computer lab |
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Target audiences

This course is also available as:

### Course Objective

The primary objective of this course is to provide students with anadvanced 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

VBA.

### Course Content

In todays financial world, the role of derivatives gets increasinglyimportant. 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

applications.

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 Methods

The course spans a period of six weeks. There will be 12 lecturesessions of 2 x 45 minutes each (for dates and times see course

schedule), in which the course material is presented. There will be

three

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 Assessment

The 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

programming language

### Entry Requirements

Students entering this course should be familiar with the basiccorporate finance principles and techniques (e. g. Berk/DeMarzo,

Corporate Finance. 2013) and investment management concepts (e. g.

Bodie, Investments. 2010). It is important to notice that this course is

not an introductory course to derivatives, but rather an advanced

introduction. To follow the course students need to have understanding

of the basic concepts of derivatives already. 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, 9th Edition, 2017

Further References:

- 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 &

Company, 2013

- 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

Press, 2004.