Derivative Instruments

Universidad del Norte

Course Description

  • Course Name

    Derivative Instruments

  • Host University

    Universidad del Norte

  • Location

    Barranquilla, Colombia

  • Area of Study

    Business, Business Administration, Finance, International Business

  • Language Level

    Taught In English

    Hours & Credits

  • Credits

    3
  • Recommended U.S. Semester Credits
    0
  • Recommended U.S. Quarter Units
    0
  • Overview

    2.    Course overview

    This course focuses on the understanding of financial derivative instruments and their applications to corporate strategy and risk management. Throughout the course, there is a clear distinction between using derivatives to appropriately manage risk and using them for speculation. The course emphasizes the perspective that derivative instruments are problem-solving tools that, when used correctly, can create value for financial and non-financial corporations. Students develop the basic mathematical tools necessary for analysis, design, pricing, and implementation of derivatives in a managerial context. The used of forward, future, option, and swap contracts, hedging, arbitrage, and derivatives-pricing models are covered. Through case preparation and discussion, students learn to model and evaluate derivative instruments and risk exposure.

    3.    Why study financial derivatives

    In recent years there has been considerable growth financial market risk awareness, systemic and non-systemic, as well as recognition of profitable opportunities within those risks during different market condition. Since the world economic crises started in 2008, financial market volatility has gotten to the point in which there is a talk of a new market where investor, hedgers, traders and other market participants must perform under high uncertainty. Financial markets for futures and options have seen a phenomenal growth due to volatility increase across the world. These markets are used by individuals and institutions to meet a variety of objectives (investing, hedging or trading). Most of all, firms and portfolio managers can hedge particular kinds of risk or alter the distribution of the returns in certain ways.
    There is a sizeable literature on option and futures valuation. While the theory might at first glance appear advanced and difficult, it is in fact quite accessible. The purpose of the course is to provide the student with the necessary skills to value and to employ options, option-like-instruments, futures and forward. In order to provide a useful treatment of these topics in an environment that is changing rapidly, under a simple and practical approach yet technically deep enough toward the development of applicable technics and analysis by course participants.


    4.    Competencies to develop

    Institutional Core Competency: Develop the capacity for abstraction, analysis and synthesis.

    Professional competence: Manage financial resources within an international environment considering the risk in transactions in derivatives markets and instruments for hedging, investing and trading.


    5.    Main objective

    This course aims to:
    The course is designed to foster an understanding of derivatives primarily forwards, futures, options, swaps. This is achieved through an introduction of the basic techniques of pricing and trading. The course also focuses on the usage of these instruments for speculation and risk management.

    6.1. Specific Learning Objectives
    •    Demonstrate a detailed knowledge of the different types of forwards, futures, swaps, options and other financial derivatives, the principal differences between them, and where and how they are traded.
    •    Demonstrate a detailed understanding of the variables (inputs) which influence the value of such derivatives, and the relationship of financial derivatives to their underlying assets.
    •    Present the alternative derivatives strategies that would be appropriate for different market circumstances, and describe the advantages and disadvantages of each.
    •    Demonstrate the uses of all financial derivatives, either alone, or in conjunction with underlying assets, to realise investment, hedging and trading objectives.
     

    6.2. Learning Outcomes

     

    Competition dimension

    Learning results

    Knowledge

    Understand the operation and characteristics of  the derivatives financial market

    Comprehend the different types of forwards, futures, swaps, options and other financial derivatives, the principal differences between them, and where and how they are traded

    Understand the different derivatives pricing technics on a practical level.

    Skills

    Estimate the risks of studied financial derivatives, and efficient ways of reporting and managing those risks.

    Present the alternative derivatives strategies that would be appropriate for different market circumstances, and describe the advantages and disadvantages of each

    Analyze the variables (inputs) which influence the value of such derivatives, and the relationship of financial derivatives to their underlying assets

    Attitudes

    Strengthen the capacity of observation and analysis, allowing students to select an appropriate and logical way to solve the respective questions, by applying the concepts of financial derivatives market under an applicable approach for companies both nationally and internationally.

     

     

     

    1. Course Content

     

     

     

    Topics

     Subtopics

    Classroom working time in hours

    Text to consult

    Introduction

    - Derivatives markets contextualization and description

    - Derivatives Products

    - Economics functions of the Derivatives Products

    -Forwards

    -Type of traders

    -Hedgers

    -Speculators

    -Arbitrageurs

    9

    Chap.1

    Hull, Options, Futures and Other Derivatives

     

    Mechanics of Futures Markets

    - Background

    -Futures Contracts Specifications

    -Types of traders and types of orders

    6

    Chap.2

    Hull, Options, Futures and Other Derivatives

     

    - Hedging strategies with futures

    -Speculation strategies with futures

    -Arguments for and against hedging

    -Basics Risks

    6

    Chap.3

    Hull, Options, Futures and Other Derivatives

     

    Options

    - Options Market contextualization and description.

     

    6

    Chap.8

    Hull, Options, Futures and Other Derivatives

    -Types of Options

    -Option positions

    3

    Chap.8

    Hull, Options, Futures and Other Derivatives

     

     

    Options

    Options trading strategies for hedging and speculation

    6

    Chap.10

    Hull, Options, Futures and Other Derivatives

     

    The Black Scholes Merton Model

    3

    Chap.13

    Hull, Options, Futures and Other Derivatives

     

    The Greek Letters: Delta, Theta, Gamma, Vega, Rho

    3

    Chap.15

    Hull, Options, Futures and Other Derivatives

     

    Swaps

    Mechanics of interest rate swaps

    6

    Chap.7

    Hull, Options, Futures and Other Derivatives

     

     

     

    1. Methodology- Teaching strategies

     

    Basic Class

    Basic class will be used to present the concepts, which will be complemented by workshops and exercises in the classroom and beyond, made ​​by students, which will allow the concepts developed consolidate and interpret the news or articles related to the international economy and international finance. This will be supported by the financial laboratory of the Business School.

    Work asignments

    This course requires work outside of class which will be supported by workshops per unit to be developed by students, for which they will have the advice of the teacher when required, this advice can be given personally or by Web Catalog of the subject.

    Trading platforms support

    This course requires the understanding and use of some trading platforms, in order to give to the students a complementary learning of how to use derivatives instruments in real world, both for hedging and speculative purposes. To achieve this, some classes require the individual use of computers for each student in order to download and learn the use of these tools.

    Applied project

    An applied project will be conducted by the students in which they will conform a hedging portfolio in order to evaluate which of the derivative instruments studied will be the best option for the particular case of a company.

     

     

     

    1. Assesment

     

    Learning evidence

    Assessment period

    %

    Midterm exam I

    Week 5

    30%

    Midterm exam II

    Week 12

    20%

    Quices y work asignments

    Throughout the semester

    10%

    Applied project

    Throughout the semester

    20%

    Final Exam

    Week 16

    20%