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Professor: |
Craig Merrill |
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Office: |
W437 TNRB |
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Phone: |
801-422-4782 |
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Email: |
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Web Page: |
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Office Hours: |
M, W 2:00 - 3:00 or by appointment |
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Teaching Assistant: |
Jeremy Kearley (derivatives626@gmail.com) |
A firm that can quantify and effectively manage risks will have a competitive advantage relative to its competitors. This course will focus on the financial risks that a firm must face in the course of doing business. Most financial risks are managed using derivatives. Thus, a large portion of this course will focus on derivatives. We will emphasize corporate use of derivatives for purposes of hedging as opposed to speculative uses of derivatives. A financial manager must understand how derivatives can be used to the advantage of the firm in order to avoid becoming yet another front page headline about the misuse of derivatives.
Through this course you will:
1. Learn what derivatives are.
2. Learn how derivatives work.
3. Gain a basic understanding of how derivatives are valued.
4. Learn a framework for corporations and individuals to determine when to use derivatives.
Most of the reading required for the course will be from the text, "Options, Futures, and Other Derivatives, 7th Edition" by Hull. Any other supplementary material will be distributed either in class or via this syllabus on the Internet.
Please bring a calculator or computer to class and to the exams.
Answers to all of the end of chapter questions are available through the links in the course schedule below. The password is available from me directly.
You are responsible for individual mastery of all of the concepts in this course. You are welcome to share ideas and work together on all of the projects for this course. You are expected to work on your own on midterm exams and on the final exam. Midterm exams will be taken in class and will be a check to see if you have internalized the ideas discussed in class and used in the projects. You may not, however, use anything from students who have previously taken this course in completing your projects or exams.
Many policies have been instituted to try to get people to just be considerate of one another. There are several official policies of the Marriott School that have been instituted because we don’t always do a good job of living the teachings of our sponsoring institution. The policies can be found here: http://marriottschool.byu.edu/classroompolicies/. The application of these policies to this class can be summarized in what I would ask of you:
1. Be honest and have the integrity to do what you say you will do. You signed the honor code. Whether you agree with all of the details or not, you signed it and indicated that you will live by it.
2. Be considerate of those around you. Treat everyone, regardless of appearance, background, beliefs, gender or any other potential difference, the way you would want to be treated.
3. Technology can enable communication and learning. It can also hinder it. Please do not be a detractor from the classroom experience of others through the use of computers, cell phones, etc.
The grade you earn will be determined by your ranking in the class based on the weighted total points accumulated on class preparation/participation, written projects, and exams. There is no predetermined percentage of the class that will get an A or that will fail. However, rest assured that if you all do exceptional work you will all get exceptional grades. The weights given to each part of the class work are as follows:
I expect every student to arrive at class prepared to participate in class. Preparation involves careful reading of assigned material and working of assigned homework. The concepts covered in this course are inherently quantitative. Mastery of the concepts requires learning the vocabulary of the discipline and working problems in order to understand the tools used in financial risk management. For most class sessions I have assigned reading from the text as preparation for class. I will assign problems from the end of the chapter for you to work as a check on your understanding of the concepts covered in class. These will be turned in and will represent 20% of your grade in the class.
I will call on students in class. There are always two good answers when called upon. One correct response would be an informed answer based on your preparation. The other correct response would be a question that shows that you have wrestled with the material in preparation for class. A good question is the beginning of understanding.
There will be projects assigned from time to time throughout the semester. These projects will assist you in understanding the class material. They will also help me to evaluate your understanding of the course material. Each project is to be turned in as if it were work product on the job. It is important to learn more than just technical skills. You must know how to write and present your ideas and conclusions. Correctly completing the calculations for the project will earn you a score of about 80%. If you present your correctly calculated results in an efficient and professional manner you can earn 90% credit on a project. Full credit will only be granted for those who add value through adding relevant and valuable insight through their work on the project. We will discuss this in detail in class.
There will be two midterms and a final exam. The purpose of these exams is to see if you have mastered the main concepts and tools of the course. The exams will be based on the end of chapter problems in the text and on the projects I assign through the semester. I will discuss these in more detail in class.
Following is the intended schedule of topics and readings for the semester. Any changes to this schedule will be announced in class and posted on the Internet. All assignments will be given in class.
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Date |
Topic |
Readings |
Assignment Due |
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Aug 31 |
Introduction |
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Sep 2 |
Intro to Derivatives |
Chapter 1 |
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Sep 7 |
Labor Day – No Classes |
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Sep 9 |
Hedging with Futures |
Chapter 2 & 3 |
Chapter 3 Questions 1, 2,
6, 7, 25 |
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Sep 14 |
Risk Aversion and Pricing |
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Sep 16 |
Risk Aversion and Pricing |
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Sep 21 |
Interest Rates – Project, YTM and Zero Rates |
Chapter 4.1 – 4.5 |
Questions 1, 3, 11, 27 a & d |
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Sep 23 |
Interest Rates – Forward
Rates |
Chapter 4.6 – 4.7 |
Questions 5, 6, 14, 15, 23 |
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Sep 28 |
Interest Rates – Duration
and Term Structure |
Chapter 4.8 – 4.10 |
Questions 7, 22, 28 |
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Sep 30 |
Forward Pricing |
Chapter 5.1 – 5.5 |
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Oct 5 |
Forward Pricing Continued |
Chapter 5.6 – 5.14 |
Questions 3, 6, 11, 12,
14 |
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Oct 7 |
No class today: Student travel day |
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Oct 12 |
Swaps |
Chapter 7 |
Questions 1, 2, 9, 11, 15,
18 |
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Oct 14 |
Review for Midterm |
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Oct 19 |
First Midterm |
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Oct 21 |
Properties of Options |
Chapter 8 & 9 |
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Oct 26 |
Option Strategies |
Chapter 10 |
Questions 10, 12, 15, 16,
21 |
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Oct 28 |
Option Valuation and the Binomial Lattice |
Chapter 11.1- 11.4 |
Questions 1, 4, 11, 14, 16 |
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Nov 2 |
Binomial Lattices Continued |
Chapter 11.5 – 11.9 |
Questions 5, 6, 12, 13, 19 |
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Nov 4 |
Black-Scholes-Merton Model |
Chapter 13 & Chapter 15 |
Questions 13: 4, 5, 16 Questions 15: 11, 16 |
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Nov 9 |
Simulation-based option
pricing |
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Nov 11 |
Midterm Review |
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Nov 16 |
Second Midterm |
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Nov 18 |
Introduction to Interest Rate Derivatives |
Chapter 26 |
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Nov 23 |
Simulation-based Pricing |
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Nov 25 |
Thanksgiving break |
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Nov 30 |
Credit Risk |
Chapter 22 |
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Dec 2 |
Credit Derivatives |
Chapter 23 |
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Dec 7 |
Derivatives Mishaps |
Chapter 34 |
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Dec 9 |
Review |
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Take Home
Final Exam |
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