JEM035 - Financial Markets Instruments I

Credit: 6
Credit ETCS: 6
Hours weekly: 2/2
Status: BEF - elective
CFS - elective
EEI and EP - elective
ET - elective
F,FM and B - mandatory
Masters - all
MEF - elective
Semester - winter
Obligatory courses:
Recommended courses:
Course supervisors: prof. Ing. Oldřich Dědek CSc.
Teachers: prof. Ing. Oldřich Dědek CSc.
Assistants: Petra Andrlíková MSc.
PhDr. František Čech
Schedule:
Announcements:
Literature: Basic recommended textbooks:
Handouts: 01 Futures Contracts, 02 Option Contracts
Blake D.: Financial Market Analysis, McGraw-Hill, 1990. (The Czech translation and the the second edition is available)
Hull J.: Options, Futures, and Other Derivative Securities, Prentice-Hall International, 1993.

Other recommended textbooks:
Blaha Z. S., Jindřichovská I.: Opce, swapy a futures: deriváty finančního trhu, Management Press, 1994.
Jílek J.: Termínové a opční obchody, Grada Publishing, 1995.
Description: The objective of the course is to provide basic and medium-level grounding in theoretical background and practical functioning of selected segments of financial markets, namely the futures and option markets. The stress is laid primarily on understanding the role of these instruments in managing financial risks and in speculative, hedging and arbitrage trading strategies. The attendants are recommended to take on the course Financial Markets Instruments II which is lectured in the summer semester.
Content: Part I: Futures Contracts
1. Basic features of forward and futures trading: distinction between forward and futures contracts, practical arrangements (clearing house, operation of margins, marking to market, delivery process, trading limits), basis (contango, backwardation).
2. Examples of financial futures contracts: stock index futures, currency futures, short-term interest rate futures, long-term interest rate futures (price factor, CTD bond).
3. Model cost-of-carry: derivation of basic formula, valuation of futures contracts, fair pricing of futures contracts (covered and uncovered interest rate parity, implied forward rates).
4. Speculative trading strategies with futures: features of speculative trade (working of leverage), open position trading (long and short positions), spread trading (intra-contract spread, butterfly spread), basis trading.
5. Arbitrage trading strategies with futures: features of arbitrage trade, box arbitrage, conversion arbitrage.
6. Hedging trading strategies with futures: typology of hedging, hedging using spot transactions, basic elements of futures hedging (hedge ratio, hedge efficiency), basis risk, interpolative hedge, minimum variance hedge ratio, practical examples o hedging with futures.

Part II: Option Contracts
7. Basic features of option contracts: definition of call and put options, profit and loss profiles, decomposition of option premium, margining in option contracts.
8. Examples of financial option contracts: equity options, stock index options, currency options, options on interest rate futures contracts.
9. Option combinations: synthetic security, combinations (straddle, strangle, strap, strip), spreads (vertical and horizontal, synthetic futures, butterfly, condor), combinations with the underlying asset.
10. Fair pricing of options contracts: binomial model, Black-Scholes model, volatility smile, sensitivity analysis, delta-hedging, gamma-hedging, put-call parity.
11. Trading strategies with options: speculative option strategies (open position trading, spread trading, volatility trading), arbitrage option strategies (credit and debit box arbitrage, conversion arbitrage), hedging option strategies (protective put, covered call, fixed and delta-neutral hedge, portfolio insurance, synthetic put option).
12. Exotic options: engineering with the payoff profile (Asian options, package options, binary options, look-back options), engineering with the content of financial instrument (barrier options, chooser options), engineering with the underlying asset (compound options, multiple-asset options).
Seminar: The first seminar will be held on September 29, 2014.
Examination dates:
Course requirements: The attendants of the course are required to pass the oral examination having fulfilled previously all seminar requirements. The knowledge of all topics covered by the handouts 01 Futures Contracts and 02 Option Contracts will be examined.
Downloadable: 01_organisational_matters
02_exercises
02_introduction_to_futures
02_solutions
03_exercises
03_financial_futures_contracts
03_solutions
04_exercises
04_valuation_of_forward_and_futures_contracts
Futures Contracts
Handbook
Options Contracts
Solution template
Written Exam Cover