General Information
This advanced finance subject explores the concept of derivatives and their associated pricing, hedging and trading strategies. This includes the rationale underlying derivative market structures and mechanics and the application and pricing of derivative products.
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Details
Academic unit: Bond Business School Subject code: FINC71-305 Subject title: Financial Derivatives Subject level: Postgraduate Semester/Year: September 2022 Credit points: 10.000 -
Delivery & attendance
Timetable: https://bond.edu.au/timetable Delivery mode: Standard Workload items: - Lecture: x12 (Total hours: 24) - Lecture
- Computer Lab: x12 (Total hours: 24) - Computer Lab
- Personal Study Hours: x12 (Total hours: 72) - Recommended study time & reviewing materials
Attendance and learning activities: Attendance at all class sessions is expected. Students are expected to notify the instructor of any absences with as much advance notice as possible. -
Resources
Prescribed resources: Books
- John C. Hull (2012). Options, Futures and Other Derivatives. 8th, Pearson
iLearn@Bond & Email: iLearn@Bond is the online learning environment at Bond University and is used to provide access to subject materials, lecture recordings and detailed subject information regarding the subject curriculum, assessment and timing. Both iLearn and the Student Email facility are used to provide important subject notifications. Additionally, official correspondence from the University will be forwarded to students’ Bond email account and must be monitored by the student. To access these services, log on to the Student Portal from the Bond University website as www.bond.edu.au
| Academic unit: | Bond Business School |
|---|---|
| Subject code: | FINC71-305 |
| Subject title: | Financial Derivatives |
| Subject level: | Postgraduate |
| Semester/Year: | September 2022 |
| Credit points: | 10.000 |
| Timetable: | https://bond.edu.au/timetable |
|---|---|
| Delivery mode: | Standard |
| Workload items: |
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| Attendance and learning activities: | Attendance at all class sessions is expected. Students are expected to notify the instructor of any absences with as much advance notice as possible. |
| Prescribed resources: | Books
|
|---|---|
| iLearn@Bond & Email: | iLearn@Bond is the online learning environment at Bond University and is used to provide access to subject materials, lecture recordings and detailed subject information regarding the subject curriculum, assessment and timing. Both iLearn and the Student Email facility are used to provide important subject notifications. Additionally, official correspondence from the University will be forwarded to students’ Bond email account and must be monitored by the student. To access these services, log on to the Student Portal from the Bond University website as www.bond.edu.au |
Enrolment requirements
| Requisites: |
Nil |
|---|---|
| Assumed knowledge: |
Assumed knowledge is the minimum level of knowledge of a subject area that students are assumed to have acquired through previous study. It is the responsibility of students to ensure they meet the assumed knowledge expectations of the subject. Students who do not possess this prior knowledge are strongly recommended against enrolling and do so at their own risk. No concessions will be made for students’ lack of prior knowledge. Assumed Prior Learning (or equivalent):
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| Restrictions: |
Nil |
Assurance of learning
Assurance of Learning means that universities take responsibility for creating, monitoring and updating curriculum, teaching and assessment so that students graduate with the knowledge, skills and attributes they need for employability and/or further study.
At Bond University, we carefully develop subject and program outcomes to ensure that student learning in each subject contributes to the whole student experience. Students are encouraged to carefully read and consider subject and program outcomes as combined elements.
Program Learning Outcomes (PLOs)
Program Learning Outcomes provide a broad and measurable set of standards that incorporate a range of knowledge and skills that will be achieved on completion of the program. If you are undertaking this subject as part of a degree program, you should refer to the relevant degree program outcomes and graduate attributes as they relate to this subject.
Subject Learning Outcomes (SLOs)
On successful completion of this subject the learner will be able to:
- Demonstrate advanced knowledge of the contractual features and properties of forwards, futures, options and credit derivatives on a range of underlying assets and commodities.
- Apply appropriate models to price forwards, futures, options and credit derivatives and be able to reproduce the mathematical derivations and economic rationale underlying these models.
- Demonstrate the ability to use option trading strategies and spreads and communicate the favourable financial conditions for each.
- Demonstrate the ability to apply and explain structural, reduced form and transition intensity-based approaches to modelling credit risk.
- Investigate several computational derivative and asset pricing models and produce a report to communicate the potential impacts of these methodologies.
Generative Artificial Intelligence in Assessment
The University acknowledges that Generative Artificial Intelligence (Gen-AI) tools are an important facet of contemporary life. Their use in assessment is considered in line with students’ development of the skills and knowledge which demonstrate learning outcomes and underpin study and career success. Instructions on the use of Gen-AI are given for each assessment task; it is your responsibility to adhere to these instructions.
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Assessment details
Type Task % Timing* Outcomes assessed Computer-Aided Examination (Open) Final Examination 40% Final Examination Period 1,2,3,4,5 Computer-Aided Examination (Open) Mid-Semester Exam 40% Week 7 (Mid-Semester Examination Period) 1,2,3 Project Develop implementations of computational models to calculate fair derivative and asset valuation and write a report that interprets the findings with reference to the literature. 20% In Consultation 1,2,3,4,5 - * Assessment timing is indicative of the week that the assessment is due or begins (where conducted over multiple weeks), and is based on the standard University academic calendar
- C = Students must reach a level of competency to successfully complete this assessment.
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Assessment criteria
Assessment criteria
High Distinction 85-100 Outstanding or exemplary performance in the following areas: interpretative ability; intellectual initiative in response to questions; mastery of the skills required by the subject, general levels of knowledge and analytic ability or clear thinking. Distinction 75-84 Usually awarded to students whose performance goes well beyond the minimum requirements set for tasks required in assessment, and who perform well in most of the above areas. Credit 65-74 Usually awarded to students whose performance is considered to go beyond the minimum requirements for work set for assessment. Assessable work is typically characterised by a strong performance in some of the capacities listed above. Pass 50-64 Usually awarded to students whose performance meets the requirements set for work provided for assessment. Fail 0-49 Usually awarded to students whose performance is not considered to meet the minimum requirements set for particular tasks. The fail grade may be a result of insufficient preparation, of inattention to assignment guidelines or lack of academic ability. A frequent cause of failure is lack of attention to subject or assignment guidelines. Quality assurance
For the purposes of quality assurance, Bond University conducts an evaluation process to measure and document student assessment as evidence of the extent to which program and subject learning outcomes are achieved. Some examples of student work will be retained for potential research and quality auditing purposes only. Any student work used will be treated confidentially and no student grades will be affected.
| Type | Task | % | Timing* | Outcomes assessed |
|---|---|---|---|---|
| Computer-Aided Examination (Open) | Final Examination | 40% | Final Examination Period | 1,2,3,4,5 |
| Computer-Aided Examination (Open) | Mid-Semester Exam | 40% | Week 7 (Mid-Semester Examination Period) | 1,2,3 |
| Project | Develop implementations of computational models to calculate fair derivative and asset valuation and write a report that interprets the findings with reference to the literature. | 20% | In Consultation | 1,2,3,4,5 |
- * Assessment timing is indicative of the week that the assessment is due or begins (where conducted over multiple weeks), and is based on the standard University academic calendar
- C = Students must reach a level of competency to successfully complete this assessment.
Assessment criteria
| High Distinction | 85-100 | Outstanding or exemplary performance in the following areas: interpretative ability; intellectual initiative in response to questions; mastery of the skills required by the subject, general levels of knowledge and analytic ability or clear thinking. |
|---|---|---|
| Distinction | 75-84 | Usually awarded to students whose performance goes well beyond the minimum requirements set for tasks required in assessment, and who perform well in most of the above areas. |
| Credit | 65-74 | Usually awarded to students whose performance is considered to go beyond the minimum requirements for work set for assessment. Assessable work is typically characterised by a strong performance in some of the capacities listed above. |
| Pass | 50-64 | Usually awarded to students whose performance meets the requirements set for work provided for assessment. |
| Fail | 0-49 | Usually awarded to students whose performance is not considered to meet the minimum requirements set for particular tasks. The fail grade may be a result of insufficient preparation, of inattention to assignment guidelines or lack of academic ability. A frequent cause of failure is lack of attention to subject or assignment guidelines. |
Quality assurance
For the purposes of quality assurance, Bond University conducts an evaluation process to measure and document student assessment as evidence of the extent to which program and subject learning outcomes are achieved. Some examples of student work will be retained for potential research and quality auditing purposes only. Any student work used will be treated confidentially and no student grades will be affected.
Study Information
Submission procedures
Students must check the iLearn@Bond subject site for detailed assessment information and submission procedures.
Policy on late submission and extensions
A late penalty will be applied to all overdue assessment tasks unless an extension is granted by the subject coordinator. The standard penalty will be 10% of marks awarded to that assessment per day late with no assessment to be accepted seven days after the due date. Where a student is granted an extension, the penalty of 10% per day late starts from the new due date.
Academic Integrity
University’s Academic Integrity Policy defines plagiarism as the act of misrepresenting as one’s own original work: another’s ideas, interpretations, words, or creative works; and/or one’s own previous ideas, interpretations, words, or creative work without acknowledging that it was used previously (i.e., self-plagiarism). The University considers the act of plagiarising to be a breach of the Student Conduct Code and, therefore, subject to the Discipline Regulations which provide for a range of penalties including the reduction of marks or grades, fines and suspension from the University.
Bond University utilises Originality Reporting software to inform academic integrity.Feedback on assessment
Feedback on assessment will be provided to students within two weeks of the assessment submission due date, as per the Assessment Policy.
Accessibility and Inclusion Support
If you have a disability, illness, injury or health condition that impacts your capacity to complete studies, exams or assessment tasks, it is important you let us know your special requirements, early in the semester. Students will need to make an application for support and submit it with recent, comprehensive documentation at an appointment with a Disability Officer. Students with a disability are encouraged to contact the Disability Office at the earliest possible time, to meet staff and learn about the services available to meet your specific needs. Please note that late notification or failure to disclose your disability can be to your disadvantage as the University cannot guarantee support under such circumstances.
Additional subject information
As part of the requirements for Business School quality accreditation, the Bond Business School employs an evaluation process to measure and document student assessment as evidence of the extent to which program and subject learning outcomes are achieved. Some examples of student work will be retained for potential research and quality auditing purposes only. Any student work used will be treated confidentially and no student grades will be affected.
Subject curriculum
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Introduction to Derivatives: discussion of the characteristics of derivatives and markets
The properties of option prices and valuation methods are discussed. Arbitrage and the Law of One Price are described with examples. Put-call parity is derived from these principles.
SLOs included
- Demonstrate advanced knowledge of the contractual features and properties of forwards, futures, options and credit derivatives on a range of underlying assets and commodities.
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Hedging and Trading Using Derivatives
Options are demonstrated graphically and mathematically. The pricing of options using the Binomial Tree valuation method is examined in detail. The relationships between Binary Trees, Binomial Lattices and Recombinant Binomial Trees are presented.
SLOs included
- Apply appropriate models to price forwards, futures, options and credit derivatives and be able to reproduce the mathematical derivations and economic rationale underlying these models.
- Demonstrate the ability to use option trading strategies and spreads and communicate the favourable financial conditions for each.
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Stochastic Processes: an introduction to pricing processes in continuous time
The main concepts of Brownian motion beginning with the formal definition of a Weiner Process is presented. The importance of stochastic models of the behaviour of security prices is discussed in the context of Modern Financial Theory.
SLOs included
- Apply appropriate models to price forwards, futures, options and credit derivatives and be able to reproduce the mathematical derivations and economic rationale underlying these models.
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Pricing Derivatives via the BSM partial differential equation and for European Style Options
The standard stochastic model of the behaviour of security prices is presented in mathematical terminology. The Black-Scholes-Merton (BSM) Partial Differential Equation (PDE) is derived. The only known analytic solution of this PDE, being for the commercial European Style Options, is examined and its implications discussed.
SLOs included
- Apply appropriate models to price forwards, futures, options and credit derivatives and be able to reproduce the mathematical derivations and economic rationale underlying these models.
- Investigate several computational derivative and asset pricing models and produce a report to communicate the potential impacts of these methodologies.
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The Greeks
There are several dimensions of risk involved in taking a position in an option or other derivative. Each of these dimensions can be addressed with various hedging strategies. Collectively, these risks are referred to as Greeks. The full set of Greeks are discussed as well as the mathematical formulas used in the context of European style options.
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Credit Risk: overview of the nature of credit risk and basic modelling approaches
The terminology of credit risk is defined and discussed. The various approaches for modelling credit risk are presented. A number of models for credit risk are discussed.
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Computational pricing of Derivatives in a risk neutral world and risk neutral pricing
The term complete market is explained and discussed in the context of risk-neutral pricing and martingales. The market price of risk is defined and the equivalent martingale measure is presented and the pricing of exotic derivatives based on this approach is demonstrated. Real world risks, risk neutral worlds, and risk neutral pricing is discussed in the context of the implementation of computational price modelling.