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2012/2013  BA-HA_E162  Financial derivatives and their applications

English Title
Financial derivatives and their applications

Course information

Language English
Exam ECTS 7.5 ECTS
Type Elective
Level Bachelor
Duration One Quarter
Course period Spring, Third Quarter
wednesday 11.40-14.15, week 5-12.
thursday 11.40-14.15, week 5,12
Changes may occur.
Time Table Please see course schedule at e-Campus
Max. participants 60
Study board
Study Board for BSc in Economics and Business Administration
Course coordinator
  • Bjarne Florentsen - Department of Finance
Secretary Marianne Andersen ma.fi@cbs.dk
Main Category of the Course
  • Finance
Last updated on 25-10-2012
Learning objectives
The course will provide students with an understanding of how financial derivative markets function and a basic toolbox for pricing and hedging derivatives. The toolbox will combine finance theory with examples and practical exercises.
By the end of the course, the students should have a broad understanding of the derivative contracts discussed in the course. This means that they should be able to:
  • Understand the payoff structure of various derivative contracts discussed in class (futures, forwards, options) for different underlying securities (e.g.stocks, financial indices, foreign exchange, commodities);
  • Understand the associated risks involved and how to manage these risks;
  • Price the types of derivative contracts using appropriated methods;
  • Understand how to use derivatives for risk management purposes;
  • Understand how to achieve a certain payoff profile by taking active positions on the derivative markets.
The course requires knowledge of basic financial theory, as acquired for example in a standard corporate finance course. This is a quantitative course and the students should be interested in appluying basic mathematics to real world problems.
4 hours written exam with aid (calculator)
4 hours written exam:
Type of test Written Exam
Marking scale 7-step scale
Second examiner No second examiner
Exam period Spring Term
Aids Closed Book
Duration 4 Hours
The exam is PC-based with no internet access. It is possible to write in hand. No other aids than English dictionaries and following calculators: Hewlett-Packard: HP10BII and Texas: Texas BAII Plus.

The re-take exam will take place using the exact same conditions as for the ordinary exam, unless the number of students for the re-take is such that it can be held as an oral exam. The exam would then be a 20 minute oral exam without preparation time. The different exam forms for the re-takes will be uploaded to the exam plan on e-campus.
Course content
This course deals with both theory and application of derivatives markets and their uses in portfolio allocation and risk management.The students will learn the fundamental concepts of derivatives pricing and hedging and apply them to a variety of debt instruments.The following areas are covered in the course:
  • The pricing of futures, forwards and swaps and the use of these instruments for hedging.
  • Basic properties of option contracts, payoff diagrams, trading strategies, and the put-call parity.
  • Applications of options in corporate hedging and compensation packages
  • The (multi period) binominal models.
  • The Black-Scholes model. Replicating portfolios and risk-adjusted valuation. Greeks and hedging. 
  • Dividends. Currency options. American options.
  • Volatility estimates, implied and historical volatility.
Teaching methods
The course consists of lectures where the basic concepts are introduced and explained and exercise classes where the students have the possibility to gain a deeper understanding of the concepts as well as practical knowledge of the methods presented in the lectures.

Exercises and additional materials for discussion for the exercise classes will be made available in advance and the students are expected to actively participate in class.

In addition to the exercise classes and lectures, there will be two voluntary problem sets, which the students can hand in in groups of 3 or 4. The problem sets will be corrected and an indicative grade will be given. Each problem set will be accompanied by a special session discussing main problems and various ways of solving them. The problem sets will be indicative of the exam.
Expected literature
The following textbook is indicative:

Hull, J: Options, Futures, and other Derivatives. 8:th Edition. Prentice-Hall.
Last updated on 25-10-2012