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2014/2015  BA-BHAAV4491U  Financial derivatives and their applications

English Title
Financial derivatives and their applications

Course information
Language English
Course ECTS 7.5 ECTS
Type Elective
Level Bachelor
Duration One Quarter
Course period Spring, Third Quarter
Timetable Course schedule will be posted at calendar.cbs.dk
Max. participants 60
Study board
Study Board for BSc in Economics and Business Administration
Course coordinator
  • Bjarne Florentsen - Department of Finance (FI)
Secretary Louise Bruun Christensen - lbc.fi@cbs.dk
Main academic disciplines
  • Finance
Last updated on 12-08-2014
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:
  • Analyze the payoff structure of various derivative contracts (futures, forwards, options) for different underlying securities (e.g.stocks, financial indices, foreign exchange, commodities);
  • Identify the associated risks involved with a derivative position and create strategies to manage these risks;
  • Price different types of derivative contracts using appropriated methods;
  • Construct and evaluate derivatives strategies for risk management purposes;
  • Replicate non-standard payoff profiles by taking active positions in the financial markets.
Course prerequisites
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 applying basic mathematics to real world problems.
Examination
4 hours written sit-in exam:
Exam ECTS 7,5
Examination form Written sit-in exam
Individual or group exam Individual
Assignment type Written assignment
Duration 4 hours
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Spring Term
Aids allowed to bring to the exam Limited aids, see the list below and the exam plan/guidelines for further information:
  • Allowed calculators
  • Allowed dictionaries
Make-up exam/re-exam
Same examination form as the ordinary exam
If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Course content and structure
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 financial 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 and may be expanded with academic articles and cases:

Hull, J: Options, Futures, and other Derivatives. 8:th Edition. Prentice-Hall.
Last updated on 12-08-2014