Introduction

Dear Students,

Welcome to the course on Derivatives I. Due to the ongoing pandemic situation, we offer the possibility for our incoming students (exclusively) to take the digital course “FIN580 – Derivatives” in the spring term. We will upload videos of all lectures that you can watch during regular lecture time or whenever it suits you best. The same holds for the exercise sessions. There will be no live session or physical meetings, but we will hold online Q&As, details TBA, and we will activate a discussion forum (on ILIAS) where students can ask questions on an ongoing basis. The exam will be held online, so that incoming students that are in their respective home countries can take the course. Please note that this is a one-time special offer for incoming international students only. Regular students have the opportunity to take the course in the next fall semester again, when we plan to offer it physically in the usual format again.

Best Regards,

Stefan

This semester (FSS 2021/22) the course is taught by Prof. Stefan Ruenzi and has similar content to the previous semester.

Lecture 1

Orientation Lecture

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.

Lecture 2

Introduction

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.

Lecture 3 & 4

Trading Strategies

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.

Lectures 5 – 7

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.

Lecture 8

Swaps

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. 

Lecture 9

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.

Lecture 10 & 11

Option Pricing

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/Ross/Rubinstein (1979) are discussed in depth. Finally, we will derive Black-Scholes prices and cover option sensitivities.

Lecture 12

Wrap-up/Summary

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.

Lecture 13

TBA

Person in charge