FINANCE 648 - Derivatives

Course Objectives

Derivatives such as futures, forwards, swaps and options are financial contracts that derive their value from some basic underlying events, for example, the value of an asset, the price of a commodity, or the performance of a company, etc.

Derivatives have become a popular investment tool over the last three decades. The notional amount of derivative contracts traded on the OTC market alone has exceeded $284 trillion in the year 2005. Many companies routinely use derivatives to hedge risks and to compensate employees. Moreover, since many financial transactions and investment decisions today contain some derivative-like features, the materials covered in this course should be useful to students planning a career in asset management, corporate finance, investment banking, sales and trading, financial consulting or any other fields that involve financial decision making.

This course is designed to achieve two main objectives. The first objective is to provide students with a framework to understand the fundamental concepts and to develop the necessary skills used in valuing derivative contracts. This will include emphasis on the key concept of “No Arbitrage Principle”, and on the two work horses of the binomial model and the Black-Sholes-Merton model.  The second objective is to apply the framework to understand a wide variety of issues related to risk management and investment decisions.

Although the course will be quantitative in nature, anybody who has taken Decision 311 (Probability and Statistics) and Finance 350 (Global Financial Management) should have enough preparation to succeed in this course. The emphasis of Finance 353 will be on economic intuitions, problem solving skills, and real world applications.