2023-2024 / FINA0052-1

Financial Derivatives


30h Th

Number of credits

 Master in economics : general (120 ECTS)5 crédits 
 Master in management (120 ECTS)5 crédits 
 Master in business engineering (120 ECTS)5 crédits 
 Master in business engineering (120 ECTS) (Digital Business)5 crédits 
 Extra courses intended for exchange students (Erasmus, ...)5 crédits 
 Master in mathematics (120 ECTS)5 crédits 
 Master in mathematics (60 ECTS)5 crédits 


Fabien Boniver, Julien Hambuckers

Language(s) of instruction

English language

Organisation and examination

Teaching in the second semester


Schedule online

Units courses prerequisite and corequisite

Prerequisite or corequisite units are presented within each program

Learning unit contents

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 more complex financial products (like swap contracts or interest rate derivaties - it was not the case in 2019).

Learning outcomes of the learning unit

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.
- Understand the concept of implied volatility, implied volatility surface, and its usefulness for analyzing the dynamics of options' prices.
- 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.


Prerequisite knowledge and skills

Prerequistes are

- fundamental finance courses

- advanced market finance course

- advanced knowledge in mathematics and inferential statistics.

A good level of English is also required. 

Planned learning activities and teaching methods

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 of delivery (face to face, distance learning, hybrid learning)

see above

Recommended or required readings

The required textbook that will be used throughout the course is :
- Hull, J. Fundamentals of Futures and Options Markets, latest edition, Prentice-Hall.
Recommended books are:
- Derman, M. The Volatility Smile: An Introduction for Students and Practitioners. M. Derman
- Gatherall, J. The Volatility Surface: a practitioner's guide.
- Kolb, R. Futures, Options and Swaps, 4th edition.
  The books will be complemented by a set of scientific articles and slides

Exam(s) in session

Any session

- In-person

written exam ( open-ended questions )

Written work / report

Additional information:

The final grade is a combination of the grades of a written exam and two group assignments. Notice, though, that the grades of the assignments are only accounted for in the calculation if:

- the student obtains a passing grade to the written exam

- the student obtains a passing grade on average over the two assignments

The relative weights between the different parts is typically 80% for the written exam, and 10% for each assignment. If the assignments cannot be taken into account, then the written exam counts for 100% of the final grade.

It will be ask, for each assignment, to detail the contributions of the various members. A studet not actively participating to the group work, will automaticaly receive a failing grade for the corresponding assignment. Assignment points cannot be transferred from one academic year to the next.

Written exam

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


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 work in groups.


Work placement(s)


Organisational remarks and main changes to the course

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.


Prof. Julien Hambuckers
email : jhambuckers[at]uliege.be 
Teaching assistant: Philippe Hübner

Association of one or more MOOCs

Items online

online notes
The core materials for the course consist of the required textbook readings Lecture notes will be available on the course web page. Other items such as problem sets will also be available on the course web page. Some additional readings on materials related to the course over the term may be provided throughout the course via the course web page. Please refer to LOLA to access the course web page.