The last twenty years have witnessed an explosion in the growth of financial products known as derivative instruments. These are products, such as futures, forwards, swaps and options, that are traded in relation to more basic underlying instruments, such as stocks, bonds, commodities and currencies. Because derivative products offer low transaction costs and new profit patterns, they have become essential tools for hedging, speculating and controlling financial risks. Options are also important because they offer a structure to evaluate residual claims such as common stocks, and can be applied to many areas of corporate finance. The purpose of this course is to provide students a working knowledge of derivative markets.
Futures contracts perform a similar function, but instead are traded on exchanges.
Swaps are agreements between two companies to exchange cash flows in the future according to a prearranged formula. This course will show how to use and price these instruments. Futures can also be used to take speculative positions, or hedge investment portfolios, using optimally determined hedge ratios. The pricing of options is more complex. It relies on a particular stochastic model for the price of the underlying asset.