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Finance 471: DERIVATIVE SECURITIES Fall 2017

Prof. Liang Ma

University of South Carolina, Moore School of Business

General information

Class meetings Lecture 1: TR 8:30-9:45 am, DMSB 135

Lecture 2: TR 10:05-11:20 am, DMSB 135

Lecture 3: TR 1:15-2:30 pm, DMSB 135

Instructor Prof. Liang Ma, liang.ma@moore.sc.edu, (803) 777-6366

For faster replies, please use the prefix “FINA 471” in the subject line of all emails.

Office Hours TR 2:40pm-3:40pm (or by appointment), DMSB 461B

Course Description and Learning Outcomes

A derivative is a contract whose value is determined by the values of other more basic underlying

variables, such as stock prices, foreign exchanges rates, or weather conditions. Such contracts are

actively traded in financial markets for hedging, speculation, or arbitrage purposes. A solid

understanding of these financial instruments is essential for any finance-related career. This course

covers the trading, structure, and pricing of the most common derivatives including forward

contracts, futures contracts, options, and swaps.

By the end of this course, students will have a good knowledge of how these contracts work, how

they are used, and how they are priced.

Prerequisites

Finance 363: Introduction to Finance

Required Textbook

The required textbook is Fundamentals of Futures and Options Markets, 9th Edition, 2017, by

John C. Hull. I also recommend you to buy the accompanying Solutions Manual and Study Guide

for this text. For each lecture covered in the class, there are relevant chapters in the textbook listed

on the Tentative Schedule. Please read relevant book chapters before coming to the class. I

will also assign end-of-chapter questions from the textbook after each lecture for you to practice.

The answer to these practice questions can be found in the Solutions Manual and Study Guide.

Course Materials

All available class materials including the lecture notes are posted on the Blackboard. Lecture

notes will be posted before classes. You should print the lecture notes out and bring them to classes.

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All information posted on Blackboard is assumed to be common knowledge, and it remains your

responsibility to be updated.

Please note that neither the books nor the lecture notes are intended to be a substitute for the

lectures and in-class discussions. The most efficient way to do well in this course is to attend all

class meetings, and you are expected to do so.

Grading

The final grade will be based on class participation and attendance, online quizzes, problem sets,

a midterm exam, and a final exam, with the following weights:

Class participation and attendance 8%

Online quizzes 5%

Problem sets 12%

Exam I (October 3, in class) 25%

Exam II (November 9, in class) 20%

Final exam (December 15, DMSB 123, 7:30pm-10:00pm) 30%

The final course letter grade will be based on the relative performance with respect to your

peers.

Exam Policies

• All exams will be closed book and closed notes. You may only use pens, pencils, erasers, and

a nonprogrammable calculator. Formulas will be provided.

• No collaboration of any kind will be permitted during the exams. If you are caught cheating

on an exam, you will receive a score of zero for the exam.

• The exams must be taken at their scheduled times, unless you have a verifiable family or

medical emergency. If you have any other circumstance that prevents you from taking the

exams on time, you must inform me within two weeks after the class starts.

• Two in-class exams will be held on October 3rd and November 9th.

• According to the Registrar’s office, the final exam will be in DMSB 123 at 7:30 pm on

December 15th . This is a common final exam for all the three sections of our class. The

final exam is cumulative, but with an emphasis on content covered after Exam I.

Online Quizzes

There will be three to four online quizzes given throughout the semester. You will need to take

these quizzes on Blackboard. These quizzes will be announced one week ahead. The purpose of

these quizzes is to make sure that you are on the right track.

Problem Sets

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I will assign three problem sets. Please work in groups of 4-5 students. Each group should only

submit ONE copy of your solutions, with all students’ names on it. Homework should not be done

in consultation with students who are not members of your group.

I expect each group member to contribute equally to the assignments. If you feel a member is not

contributing enough, you may submit a complaint, in which case I will ask all the members in your

group to submit a peer evaluation. For learning purpose, please do NOT divide up the problems

among the group members; instead I suggest each person begin each problem independently and

then bring his analysis to the group for further discussion.

Solutions to problem sets must be handed in, in hard copy, at the beginning of classes on the due

dates (see the Tentative Schedule). Late submissions will not be accepted.

Attendance and Class Participation You are expected to attend all class meetings and observe the following norms: • Come to class on time and stay the entire duration of the class.

• Turn off mobile phones, laptops, Ipad, and other electronic devices during the class.

• Ask questions whenever something is not clear.

• Participate actively in class discussions.

• Be prepared to be called to answer questions related to the course contents.

• Please prepare a legible name card and put it up in front of you during every lecture.

I will run random attendance lists. Your attendance and the quality of your

questions/observations will provide a helpful feedback to me, and will contribute to 8% of

your final grade.

University of South Carolina Honor Code and Academic Integrity

Students are expected to behave in a manner that reflects positively on the reputation of the

Moore School of Business. All students are required to follow the University of South

Carolina Honor Code, written below:

It is the responsibility of every student at the University of South Carolina Columbia to

adhere steadfastly to truthfulness and to avoid dishonesty, fraud, or deceit of any type in

connection with any academic program. Any student who violates this Honor Code or who

knowingly assists another to violate this Honor Code shall be subject to discipline.

The Honor Code is intended to prohibit all forms of academic dishonesty and should be

interpreted broadly to carry out that purpose. The following examples illustrate conduct that

violates this Honor Code, but this list is not intended to be an exhaustive compilation of

conduct prohibited by the Honor Code:

1. Giving or receiving unauthorized assistance, or attempting to give or receive such

assistance, in connection with the performance of any academic work.

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2. Unauthorized use of materials or information of any type or the unauthorized use of

any electronic or mechanical device in connection with the completion of any

academic work.

3. Access to the contents of any test or examination or the purchase, sale, or theft of any

test or examination prior to its administration.

4. Use of another person’s work or ideas without proper acknowledgment of source.

5. Intentional misrepresentation by word or action of any situation of fact, or intentional

omission of material fact, so as to mislead any person in connection with any

academic work (including, without limitation, the scheduling, completion,

performance, or submission of any such work).

6. Offering or giving any favor or thing of value for the purpose of influencing

improperly a grade or other evaluation of a student in an academic program.

7. Conduct intended to interfere with an instructor’s ability to evaluate accurately a

student’s competency or performance in an academic program.

Whenever a student is uncertain as to whether conduct would violate this Honor Code, it is

the responsibility of the student to seek clarification from the appropriate faculty member or

instructor of record prior to engaging in such conduct.

For more information about academic integrity issues, go to

http://www.sc.edu/academicintegrity/.

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Tentative Schedule (Subject to Change According to Course Progress)

Class Date Topic Reading

(Hull chapters)

Homework due

1 R, 8/24 Course Introduction

2 T, 8/29 Overview of Derivatives Markets Ch. 1

3 R, 8/31 Basics of Forward and Futures Ch. 2

4 T, 9/5 Basics of Forward and Futures Ch. 2

5 R, 9/7 Hedging with Futures Ch. 3

6 T, 9/12 Hedging with Futures Ch. 3

7 R, 9/14 Interest Rates Ch. 4

8 T, 9/19 Forward Rate Agreements Ch. 4

9 R, 9/21 Forward and Futures Prices Ch. 5 Problem set 1

10 T, 9/26 Forward and Futures Prices Ch. 5

11 R, 9/28 Review

12 T, 10/3 Exam I (in class)

13 R, 10/5 Go over Exam I

14 T, 10/10 Options Markets Ch. 9

15 R, 10/12 Options Markets Ch. 9

T, 10/17 No class1

R, 10/19 No class (Fall Break)

16 T, 10/24 Properties of Options Ch. 10

17 R, 10/26 Properties of Options Ch. 10

18 T, 10/31 Option Strategies Ch. 11

19 R, 11/2 Option Strategies Ch. 11 Problem set 2

20 T, 11/7 Review

21 R, 11/9 Exam II (in class)

22 T, 11/14 Go over Exam II

23 R, 11/16 Binomial Trees Ch. 12

24 T, 11/21 Binomial Trees Ch. 12

R, 11/23 No class (Thanksgiving break)

25 T, 11/28 The Black-Scholes-Merton Model Ch. 13, 19

26 R, 11/30 The Black-Scholes-Merton Model

Ch. 13, 19

27 T, 12/5 The Greek Letters Ch. 13, 17, 19

28 R, 12/7 Review Problem set 3

Friday

12/15

Final Exam

DMSB 123, 7:30pm-10:00pm

1 Our class meets on Tuesdays/Thursdays and therefore will meet for 29 class periods this semester, which

exceed the 28 class periods required by University policy. Therefore, we will NOT have class on October 17,

2017.