Accounting and Finance

Financial Derivatives

Module code: N1559
Level 6
15 credits in spring semester
Teaching method: Lecture, Seminar
Assessment modes: Coursework, Unseen examination

On this module, you’ll get introduced to the markets, trading and valuation of common derivative products. There’s a particular emphasis on equity derivatives, including forwards, futures and options. This module:

• explores the fundamental principles of no-arbitrage, replication and risk-neutral pricing, and shows how these concepts are applied to the valuation and use of derivatives in practice
• considers derivative payoffs, market conventions, hedging and investment applications, and the associated risk-return profiles, benefits and limitations
• gives particular attention to option markets and strategies, including put-call parity, moneyness, European and American options, price bounds and the construction of structured payoffs
• develops option valuation through the binomial tree model before introducing stochastic models of asset prices and the Black-Scholes framework
• considers exotic options.

Module learning outcomes

• Describe the function of derivatives in financial markets and discuss their advantages and limitations.
• Identify, compare and evaluate the main derivative products commonly traded in equity, foreign exchange and interest rate markets, as well as some of the more exotic instruments.
• Explain the concept of no arbitrage and recognize the central role it places in derivatives pricing.
• Implement the binomial tree and Black-Scholes models to find the no arbitrage price of a range of derivative securities. Critically examine and debate the key assumptions and limitations of the approaches.