THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301DE DERIVATIVES First Semester, 2011-2012

Instructor: E-mail: Office: Office Hours: Dr. Tao LIN tlin@hku.hk Room 914 KKL (2241-5935) By appointment Tutor: Email: Office: Phone: HO, Man Chung Clive hoclive@hku.hk 1026, KK Leung Building 2857 8308

Meeting Schedule:

FINA0301D: Tue 1:00-2:55pm and Thu 1:00-1:55pm FINA0301E: Tue 9:30-11:25am and Tue 9:30-10:25am
Course webpage: HKU WebCT

I. COURSE DESCRIPTION AND OBJECTIVES

Prerequisite: BUSI0016 Introduction to Finance or FINA1002 Introduction to Finance or FINA1003 Corporate Finance Mutually Exclusive Courses: ISME3010 Financial Engineering; MATH2906 Financial Calculus;

STAT2820 Introduction to Financial Derivatives; STAT3303 Derivatives and Risk Management, and STAT2812 Financial Economics I
Course Description: This course is Year 2 core course for Bachelor of Economics and Finance (BEF) and Bachelor of Finance (BF) students admitted to 1st year of study in 2006-07 or after. This course is designed to offer a general introduction to derivative markets and derivative products (including futures, options, swaps, and basic structured products), the pricing of derivatives (including binomial model and the Black-Scholes formula), and the applications (hedging and speculation). Required Textbook: McDonald, Robert L., 2009, Fundamentals of Derivatives Markets, (Pearson Education, Inc) Reference book: Hull, John, 2008, Seventh Edition, Fundamentals of Futures and Options Markets (Pearson Education, Inc) Course Objectives: 1. To provide a comprehensive analysis on the properties of options and futures. 2. To offer a theoretical framework within which all derivatives can be analyzed and valued. 3. To provide a solid foundation for advanced courses of the program such as fixed income analysis and financial engineering.

II. COURSE LEARNING OUTCOMES, TEACHING AND LEANING ACTIVITIES

Intended Learning Outcomes On completion of this course, students should be able to: CILO1. Explain the basic types of derivatives, their payoff functions, their developments, and the economic roles they play in the financial markets. CILO2. Explain the basic risk management and trading strategies using derivatives. CILO3. Explain no-arbitrage principle and its role in pricing financial forwards and futures.

CILO4. Explain the design and pricing of a forward rate agreement, the payoff of a Eurodollar futures, the design of swaps and how to determine the swap rate by using no-arbitrage principle. CILO5 Illustrate the put-call parity and other pricing relations between calls and puts using noarbitrage principle. CILO6. Use binomial approach to price European and American options. CILO7. Explain the Black-Scholes option formula for the price of a European option and its Greeks. Understand the idea of delta-hedging. CILO8. Apply option pricing theory in the area of financial engineering (and corporate finance, if time permits). Alignment of Program and Course Learning Outcomes Program Intended Learning Outcome 1. Acquisition and internalization of knowledge of economics & finance 2. Application and integration of knowledge 3. Developing global outlook 4. Inculcating professionalism and leadership Teaching and Learning Activities TLA1. TLA2. Lectures: Instructor will give lectures on major concepts and issues. Class attendance and active participation in discussion are expected for all students. Group Assignments: There will be four homework assignments which are designed to help the students review some of the basic concepts and to practice applying the concepts. This is a group assignment and each student will be asked to do peers review at the end of the semester. Each group can have at most 5 students and students are not allowed to change groups except under special circumstance. Forming group across sub classes is allowed and working individually is also acceptable. Tutorials: The teaching assistant will conduct the weekly tutorial sessions. The main focus of the tutorial will be on problem solving rather than concept developing. Students performance will be evaluated by the teaching assistant at the end of the semester. Consultation: Students are encouraged to consult with the instructor and tutor through emails and appointments when in need. Please come in with your questions prepared. Course Learning Outcome (CILO) CILO1, CILO2, CILO3, CILO4, CILO5, CILO6, CILO7 CILO2, CILO3, CILO4, CILO6, CILO7, CILO8 CILO1, CILO8 CILO2, CILO7, CILO8

TLA3.

TLA4.

III. COURSE ASSESSMENT

Basis of Assessment: A1. A2 A3. A4. Assessment Class and Tutorial Performance Assignments Mid-term Examination Final Examination Weights (option 1) 5% 25% 30% 40% Weights (option 2) 5% 25% 25% 45%

Lecture Notes: Hard copy of lecture notes will not be provided except under special circumstances. It is students responsibility to download and print them from the course webpage at HKU WebCT.

Group Homework Assignments: We will cover a significant amount of material each week. It is important that students keep current with the material and practice by working on the assignments. No later homework will be accepted. Mid-term and Final Examinations: There will be a mid-term exam and a comprehensive final exam (both closed-book, closed-notes) to test the students breadth and depth of the understanding of the major concepts covered in the course and students ability to integrate and apply this knowledge. Selected formulas will be provided by the instructor for both exams. There is no make-up midterm and weights will be shifted towards final if students obtain instructor's APPROVAL for midterm absence. Standards for Assessment Exams and the homework assignments are graded using the following criteria: Grade A+, A, APerformance Provide accurate solutions to all problems, give detailed and insightful responses to essay questions and score correctly on more than 90% of the multiple choice questions Provide accurate solutions to some problems, give detailed responses to some essay questions, and score correctly on less than 90% of the multiple choice questions. Provide accurate solutions to a few problems, give limited responses to some essay questions, and score correctly on less than 80% of the multiple choice questions. Provide inaccurate solutions to a few problems, give unclear responses to most essay questions, and score correctly on less than 70% of the multiple choice questions. Skip some problems or provide inaccurate solutions to most problems, give poor responses to most essay questions, and score correctly on less than 60% of the multiple choice questions.

B+, B, B-

C+, C, C-

D+, D

IV COURSE POLICIES
Class Conduct Students are required to attend all classes on time. If you miss a class, it is entirely your responsibility for what you have missed. In case you have to leave the class early, please inform the instructor beforehand and leave quietly. No use of mobile phone or chatting is allowed when the class is in session. Remember to turn off or mute the phone before each session. The instructor has the discretion to give penalty in case of class misconduct. Respect your instructors and your fellow students. Be considerate to others. Academic Dishonesty The University Regulations on academic dishonesty will be strictly enforced! Please check the University Statement on plagiarism on the web: http://www.hku.hk/plagiarism/ Academic dishonesty is any act that misrepresents a persons own academic work or that compromises the academic work of another. It includes (but not limited to) cheating on assignments or examinations; plagiarizing, i.e., representing someone elses ideas as if they are ones own; sabotaging anothers work.

If you are caught in an act of academic dishonesty or misconduct, you will receive an F grade for the subject. The relevant Board of Examiners may impose other penalty in relation to the seriousness of the offense.

V TENTATIVE COURSE SCHEDULE

Week Week 1 (Sept 1 Sept 7) Week 2 (Sept 8 Sept 14)

Topic Overview of the Course Introduction to Derivatives Sept 13 (Tue): Mid Autumn Festival, no class An Introduction to Forwards and Options Insurance An Introduction to Forwards and Options Insurance Collars, and Other Strategies Collars, and Other Strategies Introduction to Risk Management Financial Forwards and Futures Financial Forwards and Futures Currency Contract and Eurodollar Futures Currency Contract and Eurodollar Futures Interest Rate Forwards and Futures

Reading Chapter 1 Chapter 2

Week 3 (Sept 15 Sept 21)

Chapter 2, 3

Week 4 (Sept 22 Sept 28) Week 5 (Sept 29 Oct 5) Week 6 (Oct 6 Oct 12)

Chapter 3, 4, 5 Chapter 5, 6 Chapter 6, 7

Oct 17 Oct 22, Reading Week Midterm Exam: Oct 21, Friday, 2:00PM 4:00PM Room: P1 Oct 25: swap to midterm, no class Week 7 (Oct 13 Oct 26) Chapter 7 Interest Rate Forwards and Futures Week 8 (Oct 27 Nov 2) Week 9 (Nov 3 Nov 9) Week 10 (Nov 10 Nov 16) Week 11 (Nov 17 Nov 23) Week 12 (Nov 24 Nov 30) Interest Rate Forwards and Futures Swaps Swap Parity and Other Option Relationship Binomial Option Pricing Binomial Option Pricing The Black-Scholes Formula The Black-Scholes Formula Financial Engineering and Security Design Chapter 7,8 Chapter 8, 9 Chapter 10 Chapter 10, 11 Chapter 11, 12

Note: the above course schedule is subject to change. Check the course webpage regularly for any updates and announcements.