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  1. Contact Information 1 item
    1. Luiz Vitiello (EBS 3.93)


  2. Module Outline 1 item
    1.  This module focuses on the pricing of financial derivatives and their use for hedging financial risks. We start with the basics of two of the most important derivatives, futures and options. This is followed by an extensive analysis of the most widely used option pricing models, the Black-Scholes model and the binomial model and various numerical techniques for pricing financial derivatives. Futures and options are then utilised in the context of hedging financial risks. By relaxing the rigid assumptions underlying the Black-Scholes formula, alternative option pricing models are presented. Students will be provided with computer exercises that will illustrate the practical implementation of the models introduced in the module.

  3. Module Aims 1 item
    1.  The aim of this module is to provide students with an understanding of the pricing of financial derivatives and their use in hedging financial risks.

  4. Learning Outcomes 1 item
    1.  By the end of the module, students should be able to:


      • Understand the main types of derivatives and how they can be used to hedge risks;

      • Devise trading strategies and arbitrage strategies with derivative securities;

      • Understand the main concepts and methodologies underlying financial option pricing;

      • Understand option pricing models with stochastic volatility and jumps.

  5. Teaching Delivery 1 item
    1.  Weekly lectures and classes. There are also computer labs to consolidate and apply the knowledge obtained. Lecture notes will be uploaded to Moodle. Students are expected to read the relevant material and prepare ahead of the lectures. It is also strongly recommended that students read the additional material to supplement the lectures. Students should be aware that this module relies heavily on quantitative methods.

  6. Assessment 1 item
    1. Assessment is via summer exam (50%) and coursework (50%) in the form of an in-class test.

  7. Reading 8 items
    1. Key module texts 2 items
      1. Options, futures, and other derivatives - John Hull 2018

        Book Essential

      2. Options, futures, and other derivatives - John Hull, dawsonera c2012

        Book  ebook - previous edition to above

    2. Supplementary texts 6 items
      1. Advanced modelling in finance using Excel and VBA - Mary Jackson, Mike Staunton c2001

        Book Supplementary

      2. An introduction to the mathematics of financial derivatives 2014


      3. Principles of financial engineering - Robert L. Kosowski, Salih N. Neftci 2015

        Book Supplementary

      4. Derivatives: the theory and practice of financial engineering - Paul Wilmott c1998

        Book Supplementary

  8. Lecture Programme 1 item
      • Introduction to derivatives
      • Futures market (1)
      • Futures market (2)
      • Properties of option prices
      • The binomial option pricing model
      • Stochastic processes and Ito's Lemma
      • The Black-Scholes option pricing model
      • Volatility smile and alternative option pricing formulae
      • Monte Carlo simulation & exotic options
      • Trading strategies

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