Welcome to the course on Derivatives I. We are excited to teach the course in-person this year! This semester we will follow an “inverted classroom” approach to teach this course. We will upload videos of all lectures so that you have sufficient time to go through them before the respective lecture. We expect that you will post all your questions from the videos and slides for a given lecture in the ILIAS discussion forum latest by Friday, 8:00 AM the week before the scheduled lecture. During the lecture, we will go over the slides briefly and mainly focus on answering your questions. Additionally, we will offer separate exercise sessions where we will solve some problem sets with you. There will be a Q&A session towards the end of the course, details TBA, and we will activate a discussion forum (on ILIAS) where students can ask questions on an ongoing basis. The exam will be closed book held in-person. The exam dates will be announced later.
This semester (HWS 2022/
In the first lecture, Prof. Stefan Ruenzi will present an overview of the courses the Department of International Finance will offer. This overview will be part of the orientation period for Diploma as well as Master students. You can find preliminary slides discussing general background and administrative information here.
In this lecture, Prof. Ruenzi will announce the logistics of the course. We will talk about the broad outline of the course and define what derivatives are and how they can be used. We will also discuss the trading mechanisms for derivatives and the main characteristics of these contracts. We will then take a look at how basic derivatives like futures, forwards, swaps, and options work. Finally, we will spend some time on the basic pricing principles for securities in general and for derivatives in particular.
In this lecture, we will cover basic trading strategies that can be implemented using forward or option contracts. First, we will look at the payoff diagrams from various instruments at maturity. Based on this, we will investigate how we can speculate on the direction as well as the strength of price movements. We will analyze forward as well as option strategies that combine different calls, different puts, or a combination of calls and puts. We will also learn how to use derivatives to hedge existing or expected positions in the underlying. Finally, we will examine how so-called MITTS (Market Index Target-Term Securities) can be decomposed into their basic components.
Forwards & Futures
In this lecture, we focus on the pricing of forward contracts. We will determine forward prices for different underlyings at inception as well as during the life of the forward. While most of the instruments we analyze can be valued using the cost-of-carry approach (forwards on stocks, stock indexes, interest rates, currencies), we will also examine electricity forwards and exemplify how equilibrium valuation of derivatives works. We will also look at the institutional details of some of the most important futures contracts and analyze differences between forward and futures prices.
In this lecture, we will cover the pricing of swaps. After a short introduction into common types of swaps, we will focus on the valuation of commodity-, currency- , interest rate- and equity swaps. Finally, the characteristics of credit default swap contracts will be discussed and the credit default spread will be determined.
Distribution Independent Properties
This lecture deals with distribution-independent properties of options. We will determine price limits for European and American Plain Vanilla Options and prove the Put-Call Parity. Furthermore, we will cover important determinants of options prices and early exercise strategies for American Options.
In this lecture we will focus on the arbitrage-free pricing of European Options. The discrete-time one-period model and the Binomial Model of Cox/
In this lecture we discuss the impact of derivatives on the underlying and the stability of the financial system. Finally, Prof. Ruenzi will give a wrap up of the course.
Chair of International Finance
The course is fully taught in English. Supplementary material as well as the final exam are in english as well.
There will be exercise sessions taught by Santanu Kundu.
To receive a grade for the course students have to pass a final exam:
More information concerning the exam will be available during the lectures and exercise sessions.
Slides and practice sheets will be posted on the Illias system.
Please register for the course to get access to the relevant material
The introductory slides are available for download.
There are two main books, which are particularly helpful for this course:
In addition you may refer to following books, depending on your level of studies and abilities:
Additional & Advanced Books:
To take the course students should register for the exam during the exam registration period using student portal.
The early registration period for “Mannheim Master in Management” courses from the segement “Business Administration” applies.