Finance 471: DERIVATIVE SECURITIES Fall 2015 Prof. Liang Ma University of South Carolina, Moore School of Business

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1 Finance 471: DERIVATIVE SECURITIES Fall 2015 Prof. Liang Ma University of South Carolina, Moore School of Business General information Class meetings Lecture 1: TR 8:30-9:45 pm, DMSB 120 Lecture 2: TR 11:40-12:55 pm, DMSB 119 Lecture 3: TR 1:15-2:30 pm, DMSB 137 Instructor Prof. Liang Ma, (803) For faster replies, please use the prefix FINA 471 in the subject line of all s. Office Hours TR 2:40pm-3:40pm (or by appointment), DMSB 456C Course Description and Learning Outcomes A derivative is a contract whose value is determined by the values of other more basic underlying variables, such as stock prices, foreign exchanges rates, or weather conditions. Such contracts are actively traded in financial markets for hedging, speculation, or arbitrage purposes. A solid understanding of these financial instruments is essential for any finance-related career. This course covers the trading, structure, and pricing of the most common derivatives including forward contracts, futures contracts, options, and swaps. By the end of this course, students will have a good knowledge of how these contracts work, how they are used, and how they are priced. Prerequisites Finance 363: Introduction to Finance Required Textbook The required textbook is Fundamentals of Futures and Options Markets, 8th Edition, 2014, by John C. Hull. I also recommend you to buy the accompanying Solutions Manual and Study Guide for this text. For each lecture covered in the class, there are relevant chapters in the textbook listed on the Tentative Schedule. Please read relevant book chapters before coming to the class. I will also assign end-of-chapter questions from the textbook after each lecture for you to practice. The answer to these practice questions can be found in the Solutions Manual and Study Guide. Course Materials All available class materials including the lecture notes are posted on the Blackboard. Lecture notes will be posted before classes. You should print the lecture notes out and bring them to classes. 1

2 All information posted on Blackboard is assumed to be common knowledge, and it remains your responsibility to be updated. Please note that neither the books nor the lecture notes are intended to be a substitute for the lectures and in-class discussions. The most efficient way to do well in this course is to attend all class meetings, and you are expected to do so. Grading The final grade will be based on class participation and attendance, online quizzes, problem sets, a midterm exam, and a final exam, with the following weights: Class participation and attendance 8% Online quizzes 5% Problem sets 12% Exam I (September 29, Tuesday in class) 25% Exam II (November 5, Thursday, in class) 20% Final exam (December 12, Saturday, 4:00pm-6:00pm) 30% The final course letter grade will be based on the relative performance with respect to your peers. Exam Policies All exams will be closed book and closed notes. You may only use pens, pencils, erasers, and a nonprogrammable calculator. Formulas will be provided. No collaboration of any kind will be permitted during the exams. If you are caught cheating on an exam, you will receive a score of zero for the exam. The exams must be taken at their scheduled times, unless you have a verifiable family or medical emergency. If you have any other circumstance that prevents you from taking the exams on time, you must inform me within two weeks after the class starts. Two in-class exams will be held on September 29 th and November 5 th. You can only take the in-class exams in the class you register for. For example, if you register for the 8:30am lecture, you are not allowed to take the exam at 11:40am or 1:15pm. The final exam is a common final exam at 4:00 pm on December 12 th, for ALL three sessions. The final exam is cumulative, but with an emphasis on contents covered after Exam I. Online Quizzes There will be three to four online quizzes given throughout the semester. You will need to take these quizzes on Blackboard. These quizzes will be announced one week ahead. The purpose of these quizzes is to make sure that you are on the right track. Problem Sets 2

3 I will assign three problem sets. Please work in groups of 4 students. Each group should only submit ONE copy of your solutions, with all students names on it. All the group members must be in the same lecture session. Homework should not be done in consultation with students who are not members of your group. I expect each group member to contribute equally to the assignments. If you feel a member is not contributing enough, you may submit a complaint, in which case I will ask all the members in your group to submit a peer evaluation. For learning purpose, please do NOT divide up the problems among the group members; instead I suggest each person begin each problem independently and then bring his analysis to the group for further discussion. Solutions to problem sets must be handed in, in hard copy, at the beginning of classes on the due dates (see the Tentative Schedule). Late submissions will not be accepted. Attendance and Class Participation You are expected to attend all class meetings and observe the following norms: Come to class on time and stay the entire duration of the class. Turn off mobile phones, laptops, Ipad, and other electronic devices during the class. Ask questions whenever something is not clear. Participate actively in class discussions. Be prepared to be called to answer questions related to the course contents. Please prepare a legible name card and put it up in front of you during every lecture. I will run random attendance lists. Your attendance and the quality of your questions/observations will provide a helpful feedback to me, and will contribute to 8% of your final grade. University of South Carolina Honor Code and Academic Integrity Students are expected to behave in a manner that reflects positively on the reputation of the Moore School of Business. All students are required to follow the University of South Carolina Honor Code, written below: It is the responsibility of every student at the University of South Carolina Columbia to adhere steadfastly to truthfulness and to avoid dishonesty, fraud, or deceit of any type in connection with any academic program. Any student who violates this Honor Code or who knowingly assists another to violate this Honor Code shall be subject to discipline. The Honor Code is intended to prohibit all forms of academic dishonesty and should be interpreted broadly to carry out that purpose. The following examples illustrate conduct that violates this Honor Code, but this list is not intended to be an exhaustive compilation of conduct prohibited by the Honor Code: 1. Giving or receiving unauthorized assistance, or attempting to give or receive such assistance, in connection with the performance of any academic work. 3

4 2. Unauthorized use of materials or information of any type or the unauthorized use of any electronic or mechanical device in connection with the completion of any academic work. 3. Access to the contents of any test or examination or the purchase, sale, or theft of any test or examination prior to its administration. 4. Use of another person s work or ideas without proper acknowledgment of source. 5. Intentional misrepresentation by word or action of any situation of fact, or intentional omission of material fact, so as to mislead any person in connection with any academic work (including, without limitation, the scheduling, completion, performance, or submission of any such work). 6. Offering or giving any favor or thing of value for the purpose of influencing improperly a grade or other evaluation of a student in an academic program. 7. Conduct intended to interfere with an instructor s ability to evaluate accurately a student s competency or performance in an academic program. Whenever a student is uncertain as to whether conduct would violate this Honor Code, it is the responsibility of the student to seek clarification from the appropriate faculty member or instructor of record prior to engaging in such conduct. For more information about academic integrity issues, go to 4

5 Tentative Schedule (Subject to Change According to Course Progress) Date Topic Reading Homework due (Hull chapters) R, 8/20 No class T, 8/25 Course Introduction Overview of Derivatives Markets Ch. 1 R, 8/27 Basics of Forward and Futures Ch. 2 T, 9/1 Basics of Forward and Futures Ch. 2 R, 9/3 Hedging with Futures Ch. 3 T, 9/8 Hedging with Futures Ch. 3 R, 9/10 Interest Rates Ch. 4 T, 9/15 Forward Rate Agreements Ch. 4 R, 9/17 Forward and Futures Prices Ch. 5 Problem set 1 T, 9/22 Forward and Futures Prices Ch. 5 R, 9/24 Review T, 9/29 Exam I (in class) R, 10/1 Go over Exam I T, 10/6 Options Markets Ch. 9 R, 10/8 Options Markets Ch. 9 T, 10/13 Properties of Options Ch. 10 R, 10/15 No class T, 10/20 Properties of Options R, 10/22 No class (Fall Break) Ch. 10 T, 10/27 Option Strategies Ch. 11 R, 10/29 Option Strategies Ch. 11 Problem set 2 T, 11/3 Review R, 11/5 Exam II (in class) T, 11/10 Go over Exam II R, 11/12 Binomial Trees Ch. 12 T, 11/17 Binomial Trees Ch. 12 R, 11/19 The Black-Scholes-Merton Model Ch. 13, 19 T, 11/24 The Black-Scholes-Merton Model Ch. 13, 17, 19 Problem set 3 The Greek Letters R, 11/26 No class (Thanksgiving Break) T, 12/1 Credit Derivatives Ch.8, 23 R, 12/3 Review Saturday 12/12 Final Exam DMSB 123, 4:00pm-6:00pm 5