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Derivative Securities
SUBJECT GUIDE
Semester 1, 2018
Prepared by
Jonathan Dark
jdark@unimelb.edu.au
Department of Finance
Faculty of Business and Economics
Subject Outline
Introduction
Welcome to FNCE90011 Derivative Securities. This subject focuses on the application and
valuation of derivative securities, such as forwards, futures, and options. The emphasis will
be on arbitrage relations, valuation, and hedging. The overall aim of this subject is to provide
an understanding of the following topics; Forwards and futures: the mechanics of trading,
price determination, hedging strategies; Options: payoffs, arbitrage bounds, trading
strategies, the binomial model, the Black-Scholes model and its relationship to the binomial,
hedging, American options and dividends, limitations of the binomial and Black-Scholes
Models, pricing via monte carlo, Value at Risk: individual assets and portfolios.
Subject Aims
On successful completion of this subject students should be able to: Explain the role of
derivatives exchanges and the characteristics of derivative securities; Explain the role of
arbitrage as a basis for determining the prices of derivative securities; Explain the
mechanics of trading futures contracts, forward contracts and options; Design and
manipulate payoff diagrams for various derivative securities; Calculate option prices using
the Black-Scholes and binomial models; Explain how derivative securities can be used in
hedging; Reflect on the theoretical limitations of key derivatives pricing models and on
practical difficulties that arise in their implementation. Price an option using simulation
techniques.
Learning Outcomes
Subject Objectives and Generic Skills
To view the subject objectives and the generic skills you will develop through successful
completion of this subject, please see the University Handbook:
https://handbook.unimelb.edu.au/view/2018/FNCE90011
Email: jdark@unimelb.edu.au
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Email Protocol
Please note that we are only able to respond to student emails coming from a University of
Melbourne email address. Please do not use personal email addresses such as Yahoo,
Hotmail or even business email addresses. Emails from non-University email addresses
may be filtered by the University’s spam filter, which means that we may not receive your
email.
Lectures
Lecture Times
Lecture Schedule
5 Mar 28/TBA Binomial I Chapter 12, 18.1 Chapter 12, 18.1 Chapter 11, 16.1
6 Apr 11/13 Binomial II Chapter 12, 18.1 Chapter 12, 18.1 Chapter 11, 16.1
7 Apr 18/20 BSM Chapter 13.1 to Chapter 13.1 to 13.7, Chapter 12.1 to
13.7, 13.9, 19.1 to 13.9, 19.1 to 19.3 12.7, 12.9, 17.1 to
19.3 17.3
8 TBA/Apr 27 Dividends Chapter 13.10, Chapter 13.10, 15.1, Chapter 12.10,
15.1, 15.3, 15.4, 15.3, 15.4, 18.3 13.1, 13.3, 13.4,
18.3 16.3
9 May 2/4 Delta hedging Chapter 17 Chapter 17 Chapter 15
10 May 9/11 Simulation - - -
11 May 16/18 Value at Risk Chapter 20.1, 20.3, Chapter 20.1, 20.3, Chapter 18.1,18.3
20.4 20.4
12 May 23/25 Revision
Lecture Slides
Lecture slides have been placed on the LMS page for this subject.
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Assessment
Assessment Overview
Assignment
The assignment will be available on the LMS and will require calculations plus written
interpretation. You will be allocated into Groups of four. A spreadsheet containing the
members of each group will be posted on the LMS.
No questions about this project may be asked of either academics or teaching assistants.
Each group’s solution is to be the work of members of that group only. If the project is
unclear then discuss it within your own group. If you find that you need to make an
assumption, then do so and write out that assumption explicitly as part of your solution.
Save your files according to the format specified in the assignment questions document.
Assignments are to be submitted via Turnitin which will perform a similarity report
(plagiarism check). See below for further details on plagiarism and collusion.
Further details are provided in the assignment questions document on the LMS.
Final exam
3 hour end of semester exam. Successful completion of this subject requires a pass (50%)
in the final exam.
Special Consideration
If you require alternative exam arrangements (AEA), please contact the following:
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Plagiarism and Collusion
Plagiarism (failure to cite your sources correctly and completely) and collusion (unauthorised
collaboration with another person to prepare an assessment task) are considered academic
misconduct and attract severe penalties. More information, including practical advice to
students, is available on the University’s Academic Honesty and Plagiarism website.
The Library and Academic Skills also provides excellent resources to help you reference
correctly.
Assignment Submission
Assignment submission is via the LMS Assignment Submission link for all written
assignments. Please refer to the LMS Student Guide: Turnitin Assignments for detailed
submission instructions if needed.
Assignment Extension
Before completing this form, please read the Assignment Extension Guidelines regarding
acceptable reasons for requesting an extension
Exam Policy
The University requires that you are available for the entire examination period. Please see
the University's Principal Dates website for full annual calendar. Supplementary exams will
not be provided in cases of absence during the examination period unless the absence is
due to serious illness or other serious circumstances and a Special Consideration
application is submitted and approved.
Effective from 1 January 2017, the approved calculator for all subjects is the Casio FX82
(any suffix). No equivalent models of calculators will be permitted in exams.
You are required to purchase your own calculator and are responsible for ensuring your
calculator is in good working order with fresh batteries.
You are no longer required to get an "approved" sticker put on your calculator from Stop 1
or your faculty/graduate school. Instead the examination invigilators will conduct spot-checks
during examinations to ensure the correct calculators are being used.
Academic Skills
Academic Skills offers a range of workshops and resources to help you with study skills
including researching, writing and referencing, presentation skills and preparing for exams.
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Subject Resources
Prescribed References
John C Hull, Fundamentals of Futures and Options Markets, 8th edition, 2010, Pearson
Education Inc.