Financial Derivatives

Durée

30h Th

Nombre de crédits

Enseignant

Julien Hambuckers

Langue(s) de l'unité d'enseignement

Langue anglaise

Organisation et évaluation

Enseignement au deuxième quadrimestre

Horaire

Horaire en ligne

Unités d'enseignement prérequises et corequises

Les unités prérequises ou corequises sont présentées au sein de chaque programme

Contenus de l'unité d'enseignement

Over the last decades, firms have been increasingly challenged by financial price risks due to unpredictable movements in exchange rates, interest rates and commodity prices. Financial markets have responded to this increase in volatility by developing a continuously growing range of financial instruments, called derivatives, as well as strategies combining these with other traditional financial instruments. As a result, derivative markets have been rapidly increasing in volume for the last decades and derivatives are today fundamental risk management and investment tools.The goal of this course is to provide a fundamental knowledge of the concepts underlying pricing mechanisms and hedging strategies of financial derivaties, a prerequisite for any student in Financial Economics. At the end of the course students should feel more comfortable about this complex financial environment, and acquire deeper knowledge of options and futures. If the schedule allows it, some time will be dedicated to the study of swap contracts (it was not the case in 2019).

Acquis d'apprentissage (objectifs d'apprentissage) de l'unité d'enseignement

At the end of this course students will be able to   
- Understand how financial derivative instruments (forward, futures and options) work as well as for what purpose they have been designed, and explain these concepts.
- Design forward-, futures- and option-based arbitrage and hedging strategies; as well as develop optimal investment strategies integrating financial derivative instruments.
- Understand pricing mechanisms of forward/futures and option, through the notion of arbitrage portfolio construction and risk-neutral valuation, and use this knowledge to compute theoretical prices of derivatives.
- Understand the simplified binomial pricing framework, and its extension to a continuous time framework; understand the implications of the Black and Scholes model, in terms of asset dynamics, derivatives pricing and risk management; Link both theories, explain and state their underlying hypotheses.
- Compute fundamental risk measures (Greeks, Value-at-Risk) for portfolios of options,  understand such measures and give their interpretation in financial terms. Finally, understand the various methods of Value-at-Risk and Expected Shortfall estimation, their theoretical properties and the associated regulatory environment.
- Be able to understand, analyze and solve real-life, unprecise situations where investment, pricing, hedging and risk management decisions have to be made, in light of limited market data.
- Be able to research and understand a scientific article related to financial derivatives.  
Specific skills and competences trained during this course.
At the end of this course students will have:
- gained knowledge and understanding of financial (and financial engineering) techniques, of statistics and probability tools and be able to use them in order to solve rel-life financial management problems or cases;
- improved their abstract reasoning related to advanced financial concepts like risk-neutral valuation or market completeness.
- understood, in management situations, the transversal role of quantitative reasoning;
- strengthened their capacity to research autonomously and methodically the information needed to solve a complex, transversal real-life management problem, to perform a rigorous analysis of the problem at hand and to design economically sound solutions;
- developed their ability to speak in English; 
- developed team work abilities;
- strengthened their capacity for creative conception of solutions;
- strengthened their professional capacity for oral communication; 
- and strengthened their professional capacity for written communication.


 

Savoirs et compétences prérequis

Prerequistes are fundamental finance courses, as well as an advanced knowledge in mathematics and inferential statistics. A good level of English is also required. 

Activités d'apprentissage prévues et méthodes d'enseignement

The main course consists in a set of lectures (7 to 8 sessions of 3 hours). The lecture is a mix of theoretical concepts, illustrative examples, exercises and open discussions on the various concepts thaught. It is complemented with exercise sessions (2 sessions of 3 hours) that will illustrate more deeply real-life application of derivatives and the theoretical concepts (mainly pricing) viewed in the lectures. Students are expected to prepare lecture and tutorial meetings to have an active participation in class. 
Finally, the students will have to solve, per group, two assignments (1 month for each assignment). The assignments consists in solving hedging, pricing and risk management questions using real-life market data. An active participation of all member is required and will be graded. 

Mode d'enseignement (présentiel, à distance, hybride)

see above

Adaptations organisationnelles liées au contexte sanitaire

Lectures recommandées ou obligatoires et notes de cours

The required textbook that will be used throughout the course is :
- Hull, John Fundamentals of Futures and Options Markets, latest edition, Prentice-Hall.
Recommended books are:
- Cox, John C., and Mark Rubinstein, 1985, Options Markets, Prentice-Hall.
- Kolb, Robert, 2003, Futures, Options and Swaps, 4th edition, Blackwell.
 
The book will be complemented by a set of scientific articles.

Modalités d'évaluation et critères

Vous trouverez ci-dessous les modalités d'évaluation envisagées pour les examens en présentiel et à distance ainsi que celle souhaitée en cas de session hybride. En fonction de l'évolution sanitaire, la modalité choisie vous sera communiquée au plus tard un mois avant le début de la session d'examen.

Toutes sessions confondues :

- En présentiel

évaluation écrite ( QCM, questions ouvertes )

- En distanciel

évaluation écrite ( QCM, questions ouvertes )

- Si évaluation en "hybride"

préférence en distanciel


Explications complémentaires:

The final grade will be determined by

Written exam (70 %)
Ability to explain the intuition behind the various theoretical concepts studied like risk neutral pricing, binomial approach, Value-at-risk and Expected Shortfall, put-call parity, etc. Compute the price of simple derivatives using the concepts seen in class (analytically and for concrete values), identify deviations from arbitrage conditions, understand such conditions, understand and know how to use such deviations to build investment strategies; build optimal hedging strategies including financial derivatives, make risk management decisions involving derivatives, write straight-to-the-point answers
Assignments (30%)
Ability to compute price estimates using the pricing methods seen in class, ability to identify and exploit arbitrage opportunities, to build optimal investment and hedging strategies including financial derivatives, to design sound financial decision-making in the complex financial derivative environment, to write a clean, organized and comprehensive report, to wor

Please note: The final written exam counts for 80% of the final note. Each assignment counts for 10% of the final note. It will be ask, for each assignment, to detail the contributions of the various members. If a student has to retake the written exam, he can keep the grade of its assignments if she/he received at least 50% of the available points. If not, then the written exam will count for 100%. She/He can also choose to not keep the points of her/his assignment even if she/he get >50%, implying that the written exam will count for 100% as well. Assignment points cannot be transferred from one year to the other.
The written exam takes place on ECampus (MCQ and short open questions). If the situation allows it, the exam has to be taken on the campus and will be supervised (although still on ECampus).  

Stage(s)

none

Remarques organisationnelles

Finance is definitively an analytic field. As a consequence, this course will require students to understand models, do calculations and numerical analysis. Problem sets are to be handed in at the time and date as announced in class. The purpose of problem-based assignments is to understand issues, not to replicate answers. There are no "right answers" to the cases, only good arguments and weak arguments supporting the decision to take specific actions.
Students are expected to do their own work (or work within their group). At no time is it tolerated to use materials from former academic years or other sources. No plagiarism of any kind will be tolerated.

Contacts

Julien Hambuckers, Ph.D. | Assistant Professor of Finance HEC - Management School of the University of Liège (Belgium) 
 email : jhambuckers[at]uliege.be 
 
George Broché, CFA | Teaching assistant
email: pg.broche[at]uliege.be

Notes en ligne