CdLM Business Administration

Learning should be ‘critical’ and active class participation is required. Students should have a good knowledge of basic finance concepts including risk and return, arbitrage, efficient markets, stock exchanges, stocks and bonds trading. Basic knowledge of statistics help.

The course is designed for students interested in a career in financial markets. The purpose of the course is to teach students how to interpret and value the wide variety of derivatives products available for trading, including futures, options and forward contracts on equities interest rates and indices. These instruments have become extremely popular investment tools over the past several decades, as they are used by investors to hedge or increase the exposure to risks associated with changes in interest rates, exchange rates, stock prices, commodity prices, etc. The course shows how derivatives are used to achieve various hedging and speculating objectives, and introduces a basic framework for pricing derivatives.

The course will address the following topics: mechanics and hedging strategies of futures markets, determination of forward and futures prices, mechanics of options markets, properties of stock options and options trading strategies, options valuation, options sensitivity (Greeks), volatility smiles,  currency and interest rate swaps, hedging and speculating swap strategies, interest rate options, hedging with interest rate options, Forward rate agreement.

Students, after finishing the course, should:

1) have learned the characteristics and functioning of derivative products and trading methods;

2) be able to trade futures, options and swaps, build hedging and speculation strategies with these derivative products;

3) know how to evaluate the opportunity to use or not the derivative products discussed in the classroom

4) being able to explain, as if they were in the role of a junior analyst or a consultant, the functioning of financial products, their use to open a speculative position on the market or build a risk hedging strategy

5) have acquired sufficient knowledge to possibly delve into detailed technical or operational aspects autonomously

Learning should be ‘critical’ and active class participation is required. Students should have a good knowledge of basic finance concepts including risk and return, arbitrage, efficient markets, stock exchanges, stocks and bonds trading. Basic knowledge of statistics help.

• Introduction
• Mechanics of futures markets
• Hedging strategies using futures
• Determination of forward and futures prices
• Securitization and the credit crisis of 2007
• Mechanics of options markets
• Properties of stock options
• Trading strategies using options
• Valuing stock options: the Black-Sholes-Merton model
• The Greek letters
• Volatility smiles
• Exotic options and other non-standard products
• Credit derivatives
• Swaps_Interest rate swaps
• Interest rate options

The course is developed in 35 hours of lessons of theory complemented by exercises and discussion on real cases. Software for derivative pricing (DERIVAGEM and others) is part of the program, spreadsheets discussed in class will made available on the class website.

The exam will consist in a written test, with the following features:

The exam will only be in written form, and it will consist of 3 practical exercises and 21 multiple-choice questions.

• Each of the 21 theory related questions (14 from the teaching program of Prof. Giorgini, 7 from the teaching program of Prof.ssa Isaia,) will account for 1 point;
• Each of the 3 exercises questions ( 2 from the teaching program of Prof. Giorgini, 1 from the teaching program of Prof.ssa Isaia,) will account for 3 points.

Only one multiple-choice answer is correct, not answering to the question or answering wrongly will account for zero score.

You will be allowed and need to use the scientific calculator to perform the exercises, please do not forget to bring with you the calculator as you will not be allowed to use any other device to perform calculations

The lecturer suggests and provides students with interesting and recent articles, going beyond the simple program of the course. Where possible, information providers will be used to observe derivatives markets in real-time and how asset prices change when additional information flows to market participants.

TA support is also provided.