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ΧΡΗΜΑΤΟΟΙΚΟΝΟΜΙΚΗ ΜΗΧΑΝΙΚΗ

(MAF114) -  ΑΧΙΛΛΕΑΣ ΖΑΠΡΑΝΗΣ

Περιγραφή Μαθήματος

This course deals with the theory and applications of financial engineering. Designing, structuring and pricing financial engineering products (including options, futures, swaps and other derivative securities) and their applications to financial and investment risk management. Mathematical methodology that forms the basis of financial engineering, applied stochastic processes and numerical methods in particular.

Ημερομηνία δημιουργίας

Πέμπτη 3 Δεκεμβρίου 2020

Σελίδα μαθήματος
  • Περίγραμμα

    Instructors

    Professor Achilleas Zapranis

    Room: ΗΘ427
    Telephone: 2310891690
    Email: zapranis@uom.edu.gr

    Website: http://sites.uom.gr/zapranis/

    Course Objectives/Goals

    At the end of this course, students should be able to:-

    • understand the concepts of no-arbitrage, risk-neutral valuation and parity conditions
    • value financial derivatives such as forward, futures, options and swaps
    • use financial derivatives in the context of corporate hedging
    • discuss the role of financial markets and financial engineering.

    To achieve this, the course will have to use some algebra but it will also make use of spreadsheets and simulations in order to help understand the maths.

    Instructional Methods

    The course comprises 12, 120 minute sessions a day over 12 separate days. Readings are taken from the Chapters in Hull. Hard copies of selected optional readings and PowerPoint slides for each day will be distributed and they will also be available for download from the course web site. You are requested to read the relevant chapters in Hull before each class meeting.

    Learning Outcomes

    Students should understand the key concepts above and be able to apply a small range of mathematical models within these areas:-
    Financial instruments

    • forwards, forward rate agreements, futures, swaps, (including) options
    • calls, puts, caps, floors etc. on some of these assets
    • bills, bonds (and other interest rates), stock indices, commodities, currencies and inflation.

    Textbooks

    Options, Futures and other Derivatives, John C. Hull, Prentice Hall (the latest edition)
    It is strongly recommended that you purchase a copy of this text. Weekly readings (chapters) and problems will be drawn from almost all the chapters in the first half of the book (chapters 1 to 16 plus 32 and some of 26, roughly one chapter per session).

    Further Readings

    • Miller, M. H. “Financial innovation: The last twenty years and the next”, The Journal of Financial and Quantitative Analysis, 21 (4) 1986, 459-471.
    • Mello, A. S., Parsons, J. E. “Strategic hedging”, Journal of Applied Corporate Finance, 12 (3) 1999.
    •Black, F. “Fact and fantasy in the use of options”, Financial Analysts Journal, July-August 1975.
    • Black, F., Scholes, M. “The pricing of options as corporate liabilities”, Journal of Political Economy, 81 (3) 1973, 637-654.
    • Broadie, M., Detemple, J. “American option valuation: New bounds, approximations, and a comparison of existing methods”, The Review of Financial Studies, 9 (4) 1996, 1211-1250.
    • Kon, S. “Model of stock returns – A comparison”, The Journal of Finance, 39 (1) 1984, 147-165.
    • Nesbit, M. “Put-call parity theory and an empirical test of the efficiency of the London Traded Options Market”, Journal of Banking and Finance, 16 1992, 381-403.
    • Rendleman, R. J., Bartter, B. J. “Two-state option pricing”, The Journal of Finance, 34 (5) 1979, 1039-1110.
    •Bigger, N., Hull, J. “The valuation of currency options”, Financial Management”, 12 (1) 1983.
    • Cox, J. C., Ross, S. A., and Rubinstein, M. “Option pricing: A simplified approach”, Journal of Financial Economics, 7 October 1979, 229-64.
    • Ederington, L. H. and Guan, W. “Why are these options smiling?”, Journal of Derivatives, 10 (2) 2002, 9-34.
    • Jackwerth, J. C., Rubinstein, M. “Recovering probability distributions from option prices”, The Journal of Finance, 51 December 1996, 1611-31.

    Assessment Methods

    30% by Coursework (see separate document to be circulated).

    70% by Examination 

    Course Syllabus

    Detailed course outline

    Week 1
    INTRODUCTION TO FINANCIAL ENGINEERING AND DERIVATIVES MARKETS

    Introduction to financial engineering Definitions and historical development Characteristics of forwards, futures and options Payoff diagrams
    Types of traders

    Week 2
    FUTURES: MARKETS AND HEDGING ISSUES

    The operation of futures markets Hedging with futures
    Hedge ratio
    Rolling hedges

    Week 3
    FORWARD AND FUTURE PRICING

    Stock index futures
    Forwards and futures on currencies Futures on commodities
    Cost of carry
    Delivery options

    Week 4
    INTEREST RATE FUTURES: USES AND PRICING

    Preliminaries on interest rate futures
    Treasury bond, treasury note and treasury bill futures Duration and duration based hedging

    Week 5 SW APS

    Interest rate swaps Currency and other swaps V aluation
    Credit risk
    Examples

    Week 6
    OPTIONS: MARKETS, PRICES AND TRADING STRATEGIES

    Description of options and markets
    Properties of option prices, limits
    Basic trading strategies involving options
    Options on stock indices, currencies, futures contracts

    Week 7
    OPTION PRICING: NUMERICAL PROCEDURES

    The Binomial asset pricing model Monte Carlo simulation
    Variance reduction
    Finite difference methods

    Week 8

    OPTION PRICING: BLACK-SCHOLES

    Asset price random walks
    Markov and Wiener processes, geometric Brownian motion Ito’s lemma
    Derivation of the Black-Scholes differential equation
    The Black-Scholes model
    Risk neutral valuation

    Week 9
    DERIVATIVES AND ASSET MANAGEMENT: THE GREEK LETTERS

    Naked and covered positions Stop-loss and delta hedging strategies The Greeks: theta, gamma, rho Portfolio insurance

    Week 10
    MORE COMPLEX DERIVATIVES AND STRUCTURED FINANCIAL PRODUCTS

    Exotic options
    Complex swaps
    Credit derivatives
    Definition and examples of structured products

    Week 11
    CORPORATE APPLICATIONS: REAL OPTIONS

    Capital investement appraisal
    Extention of the risk neutral valuation framework Estimating the market price of risk
    Application to the valuation of a new business Evaluating options as an investment opportunity

    Week 12
    INSURANCE, ENERGY AND WEATHER DERIVATIVES

    Review of pricing issues Weather derivatives Energy derivatives Insurance derivatives