Module title: Derivative Securities / TRADING SIMULATION IIIModule code: IC301

Module provider: ICMA Centre Number of credits: 20 [10 ECTS

credits]Level: H (Honours) Terms in which taught:

AutumnModule Convenor: Nicholas Chen (n.chen@icmacentre.ac.uk)Pre-requisites: EC260 Co-requisites:Modules excluded: Current from:

2012/13

Aims:This module is designed to combine theoretical and practical approaches to derivatives pricing and trading. The objectives of the module are the following: first, to give students an overview of derivative securities and markets; second, to provide a thorough understanding of derivatives pricing and trading; third, to guide them on the use of derivatives data; and fourth, to show how to apply theoretical models and strategies presented in class through a number of case simulations. The trading cases involve both discrete and continuous time models and require students both to trade and build hedging portfolios using put and call options.

Assessable learning outcomes:By the end of the module, students will be able to:

Describe and characterize derivatives and markets Evaluate and apply pricing and trading methods Perform analysis of financial derivatives data Construct simple spreadsheets for derivatives pricing and trading

Additional outcomes:Outline content (subject to changes):Topic 1: Introduction. Forward and futures marketsTopic 2: Forward and futures prices and hedging strategiesTopic 3: Stock options, options markets and trading strategiesTopic 4: Binomial treesTopic 5: Brownian motion and Wiener processTopic 6: The Black-Scholes modelTopic 7: Options on stock indices, currencies and futures Topic 8: The Greeks and volatility smilesTopic 9: Real optionsINVEST II: Four trading sessions

Teaching and learning methods:There is a combination of lectures on the theory of derivatives markets, trading strategies and pricing methods and dealing room seminars to

conduct experimental learning and hands-on pricing and hedging exercises. Some lecturing for INVEST II in the dealing room is combined with extensive practical pricing and hedging exercises using binomial and continuous time option pricing models. During the seminars, students are guided through the solutions to exercises and the use of derivatives data. Handouts are provided. Often, material from current journals, magazines and web pages discussing issues related to the lecture’s topics is distributed. Students are made aware of information available on the internet about derivative contracts and exchanges.

Contact hours:Autumn Spring Summer

Lectures 10 x 2 hrTutorials/seminars

5 x 2 hr

Practicals 4 x 2 hrOther contact (e.g. study visit)

Total hours 38

Number of essays or assignments

1 multiple-choice test 5 assignments4 trading sessions

Other NA

Assessment:

CourseworkA multiple-choice test, four trading sessions and five (non-graded) assignments.

Relative percentage of courseworkOne multiple-choice test – weight of 20%Four trading sessions – weight of 10%Final Exam – weight of 70%

ExaminationOne 1.5 hour unseen written paper (answer any 2 questions out of 3) – weight of 70%.Part III final examinations begin in week 3 of the Summer term.

Requirements for a passA minimum mark of 40%.

Reassessment arrangementsRe-examination for Finals takes place in the Summer term of the following year.

Time Table (Subject to Changes)

Week Date Topics Room1 08/10/2012 Lecture: Intro to derivatives Chaps 1 and 2, HW 1 Small theatre G092 15/10/2012 Seminar 1 (both groups in Room G09) HW 1 Due Small theatre G09

16/10/2012 Trading 1 (Intro to trading) Trading room G083 22/10/2012 Lecture: Futures Pricing Chap 5 Small theatre G09

23/10/2012 Lecture: Futures Mechanism Chap 3, HW 2 Trading room G084 29/10/2012 Lecture: Option markets and property Chaps 9 and 10, Small theatre G09

30/10/2012 Trading 2 (Futures trading) Trading room G085 5/11/2012 Lecture: Binomial trees Chap 12, HW 3 Small theatre G09

6/11/2012 Seminar 2 HW 2 Due Trading room G086 12/11/2012 Lecture: Wiener process and Ito’s

lemmaChap 13 Small theatre G09

13/11/2012 Seminar 3 HW 3 Due Trading room G087 19/11/2012 Lecture: Black Scholes Model Chap 14, HW 4 Small theatre G09

20/11/2012 Trading 3 (Options trading) Trading room G088 26/11/2012 Lecture: Options on stock indexes and

currencies, Review Chap 16, HW 5 Small theatre G09

27/11/2012 Seminar 4 HWs 4 and 5 Due Trading room G089 03/12/2012 In-class MC Test Small theatre G09

04/12/2012 Seminar 5 MC Test Answers Trading room G0810 10/12/2012 Lecture: Greek letters and real options Chaps 18 and 34 Small theatre G09

11/12/2012 Trading 4 (Trading simulation test) Trading room G08

*On the due dates or seminar dates, teaching assistant will go over the answers of homework (HW) assignments in the first four seminars and explain the MC test in the last seminar. The assignments prepare the students for the test and the final exam. They will not be graded.

In addition, TA will cover the following mathematical material in seminars.

Seminar 1: Give two simple examples /exercises on calculating the expected value to prepare students for Binomial Tree. Seminar 2: Do one-variable and two-variable Taylor expansion to prepare the students for deriving Ito’s Lemma on Page 297 and do some exercise on the first order differentiations. Seminar 3: Use the distribution tables on Page 824 and 825 of Hull’s text book to do the CDF interpolation to prepare students for Black-Scholes Model.