Financial Derivatives and Structured Products

Aims

The purpose of this course is to introduce students to complex derivative instruments and the techniques that are required for the valuation of these instruments. The course builds on the Black – Scholes framework and extends it to options with dividends, options with stochastic parameters and American options. It then introduces students to a variety of exotic options such as Asian, Barrier and Lookback options. The course will:

  • Introduce students to the principles and tools of derivatives valuation.
  • Familiarise students with the use of these tools, both through classes and through course work.
  • Examine recent developments in the theory and practice of valuation of exotic derivative instruments.
  • Enable students to understand basic structured products.

Learning Outcomes

On completing the course the students will understand the uses, attributes and valuation of derivatives and other structured products. More specifically:

  • Stock Index Futures
  • Commodity Forwards and Futures
  • Interest Rate futures
  • Options on Stock Indices, Currencies and Futures
  • The Greeks and Basic Numerical Procedures
  • Credit Default Swap Technology
  • Asset Backed Securities
  • Credit Indices, standard Tranches and their trading

Content

  • Extension of the standard Black-Scholes European Option Model: Options on dividend-paying assets, stock index options, foreign currency options, options on futures
  • Extension to Black-Scholes European Option Model: Effect of transaction costs, stochastic interest rates, stochastic volatility
  • Compound options, Chooser options. Multi-asset European Options
  • American Options. Characterisation of the optimal exercise boundaries, Analytic formulations, and Approximate Valuation methods
  • Jump-Diffusion models for options
  • Barrier Options
  • Asian and Lookback Options
  • Spread options, Dual-strike Options, correlation options – Outperformance Options
  • Basket Options and Nonlinear Payoff Options
  • Contingent Premium Options, Hedging, Exotic Options.