Financial Derivatives and Engineering

Course Code: FIN 414

Credit Hour: 3

Course Group: Specialization Courses: Finance

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Derivatives: Forward and Future Contract – Option – Swap and other derivatives

Forward Contract: Forward Market – Participants – Quotation – Premium or discount – Relationship between forward and Spot Price – Arbitrage arguments

Futures Contract: Future Market – Clearing Houses – Positions -0 Taxation – Open Interest – Making a Market - Basis – Spreads – Regulations – Credit Conversion Factor

Options: Characteristics and Principles – Pricing Relationship and Graphical Presentation of Option’s Pay Off – Factor Affecting Prices of Options, Early Exercise, Equity as a call option – Put Call Parity and synthetic construction of Options, Effect – Trading Strategies involving options, Model of Behavior of stock prices – wiener process, The Process of stock prices and the the process of derivative securities.

Option theory and Pricing: Pricing Models: Risk Neutral Argument, - valuation –Mimicking Strategy (Synthetic construction) – Analytical Pricing Formula – Ito’s Lemma – Derivation of Black Scholes formula – implied volatilities, dividend correction - Numerical Pricing Models: Binominal Lattice Approach – Pricing corporate securities – options on currencies indices - currencies and future contracts - hedging options in option and other derivative securities.

Managing equity risk: Strategies – return enhancement strategy – value protection strategy – stock index future – portfolio insurance using put option – portfolio insurance using replication strategy.

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Text Book:

John C Hull,options, Futures and Other Derivative Securities – 6 th edition, Prentice – Hall International Inc. , 2006