Financial Derivatives

Durée

30h Th

Nombre de crédits

Enseignant

Patrick Schwarz

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.

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 forwards/futures and options, 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 real-life financial management problems or cases;

- Improved their abstract reasoning related to advanced financial concepts such as 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 English; 

- Developed team work abilities;

- Strengthened their capacity for creative conception of solutions;

- Strengthened their professional capacity for oral communication; 

- Strengthened their professional capacity for written communication.

Savoirs et compétences prérequis

Prerequistes are:

- Fundamental finance courses;

- Advanced market finance course;

- 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 of 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 taught. It is complemented with exercise sessions (2 sessions of 3 hours) that will illustrate more deeply real-life applications of derivatives and the theoretical concepts (mainly pricing). Students are expected to prepare lecture and tutorial meetings to have an active participation in class. 

Students may additionally be required to complete a group assignment, with a processing time of approximately six to eight weeks. The assignment involves solving hedging, pricing, and risk management problems using real market data, potentially through StockTrack, an educational real-time trading platform. Active participation by all group members is expected and will be assessed through an oral presentation of the results; no written report is required. Whether this assignment takes place depends on final enrolment numbers and on the availability of a teaching assistant to coordinate the StockTrack component.

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

Cours donné exclusivement en présentiel


Informations complémentaires:

see above

Supports de cours, lectures obligatoires ou recommandées

Plate-forme(s) utilisée(s) pour les supports de cours :
- LOL@


Informations complémentaires:

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.

- 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.

Modalités d'évaluation et critères

Examen(s) en session

Toutes sessions confondues

- En présentiel

évaluation écrite ( QCM, questions ouvertes )

Travail à rendre - rapport


Informations complémentaires:

The final grade combines the written exam (multiple-choice questions with a correction for guessing, plus open questions) and, if it takes place, the group assignment. Note that the assignment grade is only included in the calculation if the student obtains a passing grade on the written exam.

The usual weighting is 80% for the written exam and 20% for the assignment. If the assignment does not take place, or if its grade cannot be taken into account, the written exam counts for 100% of the final grade.

Students who do not actively participate in the group work will automatically receive a failing grade for the assignment. Assignment points cannot be carried over 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.;

- Ability to compute the price of simple derivatives using the concepts seen in class (analytically and for concrete values), etc.;

- Ability to identify deviations from arbitrage conditions, understand such conditions, understand and know how to use such deviations to build investment strategies;

- Ability to build optimal hedging strategies including financial derivatives, make risk management decisions involving derivatives;

- Ability to write straight-to-the-point answers.

Assignment

- Ability to compute price estimates using the pricing methods studied in class;

- Ability to identify and exploit arbitrage opportunities;

- Ability to build optimal investment and hedging strategies including financial derivatives;

- Ability to design sound financial decision-making in the complex financial derivative environment;

- Ability to write a clean, organized and comprehensive report, to work in groups.

Stage(s)

none

Remarques organisationnelles et modifications principales apportées au cours

Finance is by nature an analytical field. As a consequence, this course requires students to understand models, perform calculations, and carry out numerical analysis. The purpose of problem-based work is to understand the underlying issues, not to reproduce answers. There are no "right answers" to the assignment, only strong and weak arguments in support of a particular decision.

Students are expected to do their own work, or to work within their assigned group. Using materials from former academic years or from other undisclosed sources is not tolerated, and no plagiarism of any kind will be accepted. The group assignment does not involve a written submission; the deliverables are the presentation slides and, where applicable, the progress recorded on StockTrack.

The use of AI tools is permitted and may in fact be encouraged for parts of the assignment. Where AI tools are used, this must be stated openly, indicating which tool was used and for what purpose. Students remain fully responsible for the accuracy of any results and for their ability to explain and defend them during the oral presentation.

Attendance at lectures and tutorials is not required but is strongly recommended. Some exam questions may draw specifically on material presented orally during lectures or tutorials. Attendance at invited guest lectures is compulsory.

Contacts

Prof. Dr. Patrick Schwarz

email : patrick.schwarz[at]uliege.be 

 

Teaching assistant: Tba

email : tba

Association d'un ou plusieurs MOOCs

Aucun MOOC n'est associé à ce cours.

Notes en ligne