FINN 6210 / BPHD 8240: Financial Elements Of Derivatives .

FINN 6210 / BPHD 8240: Financial Elements of Derivatives / DerivativesSpring Semester, 2020Professor:Office:E-mail:Class:Office hours:Course web pages:David C. MauerFriday Building Room 349, phone (704) 687-7707dmauer@uncc.eduTuesday 5:30-8:15 pm, Center City 604Center City before/after class in Room 713 faculty cubicles and byappointmentCanvasCourse DescriptionThis course examines derivatives, which are securities whose values derive from (or arecontingent on) the price of an underlying asset. The specific types of derivative securitieswe examine include forward and futures contracts, swaps, and options. We will learn how tovalue these securities and how to use them for risk management purposes. A central themein our discussion on valuation is that there should be no opportunities for riskless arbitragein well-functioning markets. We will learn the mechanics of futures and options trading andimplement trading strategies to mitigate various types of risk.Learning OutcomesKey concepts that students will learn in this course include: What are forward and futures contracts, and how are they used by market participantsto hedge various types of price and/or quantity risks? How are futures prices determined, and what is the relation between futures pricesand spot prices? How can firms use swaps to transform assets and liabilities from floating to fixed orfrom fixed to floating? How can individuals and firms use options to create alternative payoffs or to profitfrom any type of market environment? What are the important models to price options and how can we use these models tocompute the Greeks? How can we use options and futures to hedge and alter the systematic risk ofinvestment portfolios?Course Materials1. Textbook: John C. Hull, Options, Futures, and Other Derivatives, 2018 10th Edition.You may also want to pick up the solutions manual Options, Futures, and OtherDerivatives 10e: Solutions Manual.Note: The 2015 9th Edition of Options, Futures, and Other Derivatives is virtuallyidentical to the 10th Edition and can be used instead of the 10th Edition.2. Lecture Notes: Class lecture notes will be posted on Canvas.

3. Handouts: Problem sets and solutions will be distributed in class and/or posted onCanvas.4. Calculator: You will need a calculator with the following functions: yx, 1/x, ex, and ln.A good business calculator (or a cheap scientific calculator) will have these functions.Options SoftwareThe 10th edition of the Hull book includes DerivaGem 4.00, which consists of two excelapplications: the Options Calculator and the Applications Builder. We will use the OptionsCalculator. For our purposes, earlier editions of the software (e.g., DerivaGem 3.00) canalso be used.CommunicationThe easiest way to contact me is via email. I frequently check my email and will alwaysrespond to your email. If I haven’t responded, that means, for whatever reason, I did notreceive it. Please continue to email me until you get a response. If you can’t email me, leaveme a voice message.I will contact you on your UNC Charlotte email address (@uncc.edu). If you respond to mewith another email address, I will assume it is fine to respond back to you at that same emailaddress. When I email the entire class, however, I will only use your UNC Charlotte emailaddress.Problem SetsThere will be four problem sets this semester. The purpose of these problem sets is toprovide you with applications of the material covered in the course. The first problem setinvolves the design of futures contracts. The second problem set covers futures, futurespricing, risk management strategies using futures contracts, and interest rate futures. Thethird problem set covers swaps and price restrictions on options. The fourth problem setcovers option trading strategies, option pricing, and risk management strategies usingoptions. These problem sets will count for 30 percent of your total course grade. Theproblem sets are due at the beginning of class on the date that they are due (see courseoutline). Any problem set handed in after that time will be considered late. You will lose25% of the grade for a problem set for each day that it is late. You may work on problemsets in a group with no more than two (2) students. Each group will turn in only oneproblem set. You do not have to work with the same group for each problem set and youare not required to work in a group.Practice QuestionsLecture Note Questions: Each course lecture note has a set of questions with answers.These questions and answers are posted on Canvas.Practice Questions (optional): Each chapter in Hull concludes with Practice Questions.Answers to the Practice Questions are in the Solutions Manual.Exams2

There will be a midterm and final exam that cover class lectures, problem sets, practicequestions, and class readings. The final exam covers class material after the midterm (i.e., itis not cumulative). You will be allowed to bring one 8.5" x 11" sheet of paper with notesand formulas -- both sides are fine. The paper must be handwritten, not photocopied, andmust be handed in along with the exam. Exams are scheduled well in advance so that youcan plan around these dates. Please do not ask to be excused from exams for matters ofpersonal convenience. An unexpected absence without supporting documentation will resultin a grade of zero. The midterm and final exam will each be worth 35% of your total coursegrade.Summary of Overall GradingItem% of GradeProblem SetsProblem Set 1Problem Set 2Problem Set 3Problem Set 430ExamsMidtermFinalDue DateJanuary 28February 18March 31April 283535February 25May 5 (5:00-7:30 pm)Grading ScaleThe grading scale for the course is as follows:Wtd. Avg. % * 90[78, 89][68, 77] 67Letter GradeABCU* Example: A student receiving 85%, 75%, 95%, and 100% on Problem Sets 1-4, and 75%and 85% on the midterm and final exams will have an overall weighted-averagepercentage of (0.075)(85) (0.075)(75) (0.075)(95) (0.075)(100) (0.35)(75) (0.35)(85) 82.63% and receive a letter grade of B.LecturesLectures will stress the most important topics covered in the textbook. You are responsiblefor all material covered in class, assigned readings, problem sets, and practice questions.Lectures will go beyond the scope of the textbook for certain topics. Therefore, it isimportant that you attend class. You are responsible for all announcements made inclass.College and University Policies3

Statement on Disability AccommodationsUNC Charlotte is committed to access to education. If you have a disability and need academicaccommodations, please provide a letter of accommodation from Disability Services early in thesemester. For more information on accommodations, contact the Office of Disability Services at704-687-0040 or visit their office in Fretwell 230.Codes of ConductAll students are required to read and abide by the UNC Charlotte Code of Student ). Violations of the Codes will result in disciplinary actionas provided in the Codes.It is the student’s responsibility to be fully and accurately informed of University policies,including, but not limited to, rules regarding dropping and adding classes, graduationrequirements, and student conduct. The Dean of Students Office is the authoritative source forthese policies.Statement on DiversityThe Belk College of Business strives to create an inclusive academic climate in which thedignity of all individuals is respected and maintained. Therefore, we celebrate diversity thatincludes, but is not limited to ability/disability, age, culture, ethnicity, gender, language, race,religion, sexual orientation, and socio-economic status.4

Course OutlineEach class period includes readings from Hull and my lecture notes. Except for the exam dates,all dates in the course schedule are approximate and may change depending on our pace throughthe material.DatesTopicJan 14Introduction to Derivative Securities Hull, Chapters 1 and 2 Lecture Note 1Jan 21 and Jan 28Pricing Forwards and Futures Hull, Chapter 5 Lecture Note 2Jan 28Problem Set 1 Due (beginning of class)Feb 4 and Feb 11Futures Hedging Strategies Hull, Chapter 3 Lecture Note 3Feb 18Interest Rate Futures Hull, Chapter 6 Lecture Note 4Feb 18Problem Set 2 Due (beginning of class)Feb 25Midterm ExamMar 2 – Mar 7Spring BreakMar 10Swaps Hull, Chapter 7 Lecture Note 5Mar 17 and Mar 24Option Specifications, Price Restrictions, andEarly Exercise of American Options Hull, Chapters 10 and 11 Lecture Note 6Mar 31Option Trading Strategies Hull, Chapter 12 Lecture Note 75

Mar 31Problem Set 3 Due (beginning of class)April 7Binomial Trees and Risk Neutral Valuation Hull, Chapter 13 Lecture Note 8April 14Primer on Stochastic Calculus Hull, Chapters 14 Lecture Note 9April 21 and April 28Black-Scholes-Merton Model and Greeks Hull Chapters 15 and 19 Lecture Note 10April 28Problem Set 4 Due (beginning of class)May 5Final Exam (5:00-7:30 pm)6

1. Textbook: John C. Hull, Options, Futures, and Other Derivatives, 2018 10th Edition. You may also want to pick up the solutions manual Options, Futures, and Other Derivatives 10e: Solutions Manual. Note: The 2015 9th Edition of Options, Futures, and Other Derivatives is virtually