Derivatives Markets

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The course aims at profound understanding the specifics of derivative markets.

Vast scope of real derivative instruments traded on world exchanges will be described: starting with plain futures/forwards, through swaps, vanilla options, exotic instruments, ending with advanced financial derivatives like CDS. Both theoretical (pricing) and practical (trading, risk management) aspects are going to be addressed with reference to various asset classes: stocks, commodities, currencies. Derivatives markets will be analyzed also in the context of recent macroeconomic developments and growing role of speculation in pricing the assets. The lecture will be conducted mainly via multimedia slideshows. Upon starting the course students are expected to have micro- and macroeconomic background as well as intermediate skills in mathematics and probability/statistics.

Final exam test is scheduled to complete the course, and one minor written work in the mid-semester.

The lecture starts with overview of main classes of tradable assets, such as stocks, indices,

bonds, commodities (with subsectors), currency pairs and some alternative assets. These

assets serve as underlying for derivative instruments. Leading stock and/or derivative

exchanges will be introduced and described: NYSE, Euronext/Liffe, NYMEX, COMEX,

CBOE, NYBOT, ICE and most liquid local exchanges. Highlighting their brief history and

developments, consolidation processes. Detailed description of various types of derivatives:

plain futures/forwards; vanilla options; swaps, exotic options. Vital practical issues will be

tackled: pricing, real trade, commercial usage for risk management, arbitrage or speculation.

In case of options practical aspects of Greek analysis will be presented. Discussing the

volatility, nonlinearities and term structures. The contents of the lecture will be successively

enriched with case studies and rooted in current market development context (monetary

politics, boom-bust cycles, dominant role of speculation, etc.). Students will learn the

empirics of derivatives markets, studying specific behaviors of respective underlying

segments (e.g. agricultural commodities, emerging markets currencies.

The course in general is intended to cast a multicolor light on derivatives world but with no in-depth analysis of formal regulations and juridical solutions.

Readings

Compulsory readings:

Hull J. C, Options, Futures and Other Derivatives; Prentice Hall 2005 or later

Supplementary readings:

1. Whaley R. E., Derivatives: Markets, Pricing and Risk Management; John Wiley & Sons

2006

2. McDonald R.L., Derivatives Markets; Addison Wesley, 2006

3.Wilmott P., Paul Wilmott On Quantitative Finance, 2nd Edition, John Wiley & Sons, Chichester 2006.

4. Wilmott P., The Best Of Wilmott 1 and 2 , John Wiley & Sons, 2004, 2006.

Students will acquire profound knowledge about derivative instruments, including: specifics of futures, various classes of options, swaps and alternative derivatives. The course's main aim is to popularize the specifics of derivatives with their broad practical usage possibilities (hedging, diversification, speculation). Theoretical aspects as pricing are to be confronted with real market trade. On finishing the course students possess versatile knowledge encompassing theoretical and practical aspects of derivatives markets. They also gain up-to-date multi-aspect familiarity coupled with current macroeconomic background. Classes

perform a complementary role of enhancing practical aspects.

KW01, KW02, KU01, KU02

Final assessment will consist from three parts:

1. written assessment project - the description of scientific paper focusing on verification of models and theories presented during the lectures or focusing on press article covering current economic situation,

2. mid-term exam,

3. final exam.

The student has to pass the mid-term exam and give back the project in order to be admitted to final exam.

Classes are intended as complimentary to lectures.