FIN 580 – Derivatives – Basic Strategies and Pricing

General Information

In HWS 23, we will offer FIN 580 in tandem with FIN 630 Corporate Governance. This means that FIN 580 will be taught during the first half of the semester and then FIN 630 is taught during the second half of the semester. However, the courses are independent and you can sign up for each of them individually (both or one of them).  

Due to conflicting events, we have to adapt the program of the first lecture week. We will have the following sessions:

• The first lecture will take place on September 5, 10:15 – 11:45, in O151.
• The second lecture will be held on September 6, 13:45 – 15:15, in EO 145.
• The first tutorial will be held on September 6, 15:30 – 17:00, in EO 145.
• Except from these three sessions, no other sessions will take place during the first lecture week

From lecture week two on, we will follow the schedule as indicated in Portal2:

• Lecture: Tuesday, 10:15 – 11:45, O151; Wednesday, 10:15 – 11:45, EO 145
• Tutorial: Slot1: Wednesday, 13:45 – 15:15, EO 145; Slot 2: Wednesday, 15:30 – 17:00, EO 145

The last lecture will take place on October 18, 2023. The first exam date is scheduled for November 3, 2023.

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