INFORMATION ABOUT THE COURSE

COURSE TITLE: EQUITY AND FOREIGN EXCHANGE DERIVATIVES

COURSE CODE: M3.1 CREDIT POINTS (ECTS): 2

COURSE LEADER: Tadeusz Czernik PhD

TEACHING STAFF: Tadeusz Czernik PhD

DIRECT CONTACT HOURS: 15

DURATION: ONE semester

SEMESTER OF DELIVERY: Winter

FACULTY: Finance & Insurance

LEVEL OF THE MODULE: Master: Quantitative Asset and Risk Management ARIMA

PREREQUISITIES

Obligatory: Students should have a basic working knowledge of Mathematics and

Statistics

Recommended: Fundamentals of Finance

OBJECTIVES:

- to give intensive practice in derivative pricing methodologies

- to develop analytical skills in stochastic modeling of financial derivatives

TEACHING AND LEARNING METHOD:

No Teaching method Description Hours (45’) 1 formal teaching formal lecture with formulae description 6

2 practice exercises solving exercises with personal calculator 6

3 work in groups discussion of some practical issues 2

4 progress check revision session 1

SUM 15

No Learning method Description Hours (45’)

1 individual literature

studies researching and reading 20

2 individual work solving exercises 10

3 case studies solving received case studies 5

SUM 35

CONTENTS:

1. Binomial tree: calibration, vanilla and exotic options pricing, European and

American options pricing, replication portfolios, hedging, risk-neutral measure

2. Introduction to stochastic calculus: Wiener process, stochastic differential

equations, Ito’s theorem, expected value of a stochastic processes

3. Geometric Brownian motion: motivation, SDE, expected value and variance

4. Black – Scholes model: derivation of pricing PDE, solution methods, relation to

binomial tree, risk-neutral measure and Feynman-Kac theorem

5. Greeks and sensitivity analysis: hedging, portfolios

6. Introduction to FX derivatives

LEARNING OUTCOMES:

After completing the course a student might be able:

- to find a price of equity and foreign derivative instruments

- to construct hedging portfolios

- to calibrate binomial and Black – Scholes models

ASSESSMENT METHOD:

No Assessment method Description Weighting (%)

1 case study solving problems 90%

2 test multiple choice test 10%

CORE READING

K.Cuthbertson, D.Nitzsche: Quantitative Financial Economics, Wiley 2004

Wilmott P. Paul Wilmott on Quantitative Finance, Wiley 2006

Hull J.C., Options, Futures and other Derivatives, Pearson Prentice Hall 2009

INDICATIVE LITERATURE

Shreve S.E., Stochastic calculus for finance, vol. 1,2, Springer 2008

Haug E.G., The Complete Guide to Option Pricing Formulas, McGraw_Hill 2007

LANGUAGE: English