Module code: EC3070
Module co-ordinator: Professor Ali al-Nowaihi
The process of trade - in wheat, oil, houses, stocks and shares, or whatever - usually involves writing a contract that specifies the various aspects of the goods such as quality, quantity, price and delivery date. However, once such a contract is written, the contract itself can be traded. The contract is called a financial derivative.
Two prerequisites for trade are an appropriate institutional arrangement to facilitate trade and a price at which to trade. In 1973 the financial markets were revolutionised by two almost simultaneous but independent events. The first was the formation of the Chicago Board of Options Exchange (CBOE) which provided a place to trade financial derivatives, standardised contracts and insurance. The second event was the publication of the Black-Scholes-Merton model which provided the first rigorous and systematic method for pricing financial derivatives and is the foundation of all subsequent models.
The financial derivative market across the globe is now worth an estimated $200 trillion requiring highly skilled quantitative analysts and traders to price and manage portfolios of a range of derivative assets. Managing and understanding financial risk is of paramount importance when dealing in derivatives so as to avoid potential banking disasters and huge financial losses.
- European and American put and call options
- Binomial trees, arbitrage, hedging and risk neutral valuations
- Pay-off and profit diagrams
- Trading strategies using European put and call options
- Credit default swaps
- The role of financial derivatives in the current financial crisis
- The Black-Scholes-Merton model
20 one hour lectures
10 one-hour seminars
- Exam, 90 minutes (100%)