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| Instructor: Dr. John Elder Phone/Office: 231-6532; Putnam 22 E-mail: john.elder@ndsu.edu Web: http://www.ndsu.edu/ndsu/jelder/ |
Course: BUSN 442/642; 3782/3815 Meeting: 9:30-10:45; Ladd 114 Prereq: BUSN 340; BUSN 44x Office Hr: W 12-2, after class, by appt; |
Speculative Markets - Description
This course addresses issues dealing with the analysis and pricing of derivative securities, such as futures, forwards and options. Derivative securities can be defined as legal contacts whose value is derived from some underlying asset (such as a stock or bond). In this course, we will spend more time discussing the properties of derivatives than the underlying financial assets, so it is important that you have a firm grasp of these latter properties from your earlier courses and experience in finance.
As a professional course, the curriculum is designed to provide sufficient foundation for graduates to pursue professional certification, such the Chartered Financial Analyst (CFA®) program. Be aware that this course can be difficult. Derivatives securities are, in many cases, priced on the basis of arbitrage arguments that some find difficult to follow. Additionally, some topics, such as the Black-Scholes option pricing formula, have several mathematical and statistical components, requiring students to recall the properties of natural logarithms, natural exponents, variance, covariance and Gaussian (Normal) distributions. Explicitly, we avoid using calculus in this course, but astute students will recognize that many of the concepts (such as change in value of a variable (or a function) with respect to a change in some other variable x) can be addressed more formally with calculus. Some of the topics we discuss intuitively are actually based on relatively sophisticated mathematical tools (such as Brownian motion). The interested student can find the mathematical derivations for the many of these issues in Options, Futures and Other Derivatives by John C. Hull (Prentice Hall).
Career Focus - This course provides useful information for the educated investor, but the majority of issues we discuss are beyond the scope of the individual investor. Rather, much of this courses address tools and methods that financial institutions, professional traders and non-financial firms use to either hedge, speculate (with considerable leverage) or arbitrage. Such financial institutions include banks, mutual funds, insurance companies, investment banks and other securities firms that trade financial assets or commodities.
Course Objectives - Over this semester, you will learn some of the skills necessary to analyze and describe the following: (1) the properties of common derivative securities, such as futures, forwards and options and the markets in which they trade; (2) the relative value of derivative securities via arbitrage (3) the risk characteristics of derivative securities; (4) the basics of valuing options based on binomial trees and option pricing formulae; (5) the use of derivative securities for hedging, speculation and security creation.
If you have any problems with this class, please see or e-mail me. I am available after class and always during posted office hours, but feel welcome to e-mail or call me at the office anytime. (Please note that the worst time to drop by is usually the 30 minutes just prior to class, as I am typically gathering materials for class and walking to class during that period.) I am at the office everyday (plus some weekends and evenings), unless I have another class, appointment or meeting. If I am not in, the best way to leave a message is via e-mail. You should know that I take seriously my obligation to provide students a classroom experience that promotes and facilitates learning. Finally, be sure to also read my secret tips for exams.
Course materialsThe materials you will need for this course are:
-Hull, Fundamentals of Futures and Options, 6th ed, Prentice Hall, 2008.
-Wall Street Journal (optional), sign up on-line here.
-OTIS trading account (optional) This could be alone or with group with 2-4 students. There are some assignments in which you can practice trading options and futures, these assignments are not required. Sign up at http://wharton.pearsoncmg.com/otis with course ID otis-elde716424.
-Calculator that computes exponents (almost any will suffice).
The text by Hull is a very popular book nationally (and internationally) for this course. It is available at the bookstore and from on-line bookstores. The Wall Street Journal costs about $30 for the semester, but you might consider sharing each of these with a friend. The Wall Street Journal is also available at the library at no charge. If you are interested in learning more about practical finance and the recent history and culture of Wall Street, there are a number of very entertaining bestsellers you should consider reading. Here are a couple (more on this web page):
When Genius Fails: The Fall of Long-term Capital Management, by Roger Lowenstein
Liar's Poker and The New, New Thing both by Michael Lewis
Course Organization
This course is designed to foster participation and interaction. Usually participation will be solicited in a question and answer format, and you will frequently be called upon by name to participate. This requires that you prepare for each class by keeping up with the readings and assignments. To encourage you to do so, there will be several quizzes throughout the term. The quizzes may be announced or unannounced, so you should be prepared for a short quiz each lecture, but especially when specific "learning exercises" are suggested. (Learning exercises are similar to homework, but they are not collected. The learning exercises are designed for your benefit: to help create and reinforce your learning and hence your performance on exams. I call them learning exercises, because if you do not work through them, you are not likely learn.) In addition, you will periodically be required to prepare a short, one or two paragraph summary of a news article related to finance or economics (e.g,. from the WSJ), and you should be prepared to discuss that article in class. Your discussion should be no more than 2 minutes (practice to be sure you finish within that limit) and your summary must be typed and turned in after class along with the original article. Be careful -- your summary must be in your own words, not plagiarized from the original article. I will assign dates for the news summaries on the first or second day of class.
In addition to the usual textbook material, we will be working on some computer assignments during the semester. Students are expected to be proficient in the use of computer spreadsheets, such as Excel.
Course Etiquette:
1. Please attend class and be on time.
2. If you do miss class, please retrieve notes and announcements from a classmate.
3. Please attend class to review your exam. There are no provisions for make-up examinations or extra credit.
4. For assignments to be handed in, essays must be typed, multiple pages stapled, and late assignments cannot be accepted.
5. All work in this course must be completed in a manner consistent with NDSU University Senate Policy, Section 335: Code of Academic Responsibility and Conduct. ( http://www.ndsu.edu/policy/335.htm )
6. Any students with disabilities or other special needs, who need special accommodations in this course are invited to share these concerns or requests with the instructor as soon as possible.
Grading
There will be two midterm exams, a cumulative final exam and several assignments/quizzes. The exams will be administered on the dates indicated on the course outline. Excuses to the exams are very rare, but would include a College sponsored excursion or extreme illness documented by a physician's note. If you are excused from an exam for such a purpose, your final exam will be reweighted to account for the missing score. Assignments and quizzes will be graded on a scale from 1 to 5. In the rare event that you have questions regarding the grading of a midterm exam or assignment, you must see me before the final exam is administered. Letter grades will be determined by computing an average according to the weighting scheme below, where an average of 90+ is an "A"; 80-89 is a "B"; 70-79 is a "C"; 65-69 is a "D"; and below 65 is an "F". It is possible that a curve on the final average will be implemented, if appropriate. The weighting scheme is as follows: HW & Quizzes 30%; Midterm I 35%; Final 35%. Exams will typically include both problems and some multiple choice. Please bring a blue OCR bubble sheet to class for exams.
Graduate Credit
Students taking the course for graduate credit must also complete a survey paper on an acceptable topic related to the field of finance. The topic must be discussed and approved by me during the first 4 weeks of the semester. The survey paper must draw on sources that are of adequate depth and quality to justify graduate credit. Newspapers and many freely available sources on-line are not likely to be sufficient. Two excellent sources that merge academic research with practitioner applications are Financial Analysts Journal and Journal of Portfolio Management. Both are available electronically through the NDSU library. Please see me as soon as possible to discuss possible topics and sources. The survey paper will account for 5% of the course grade (correspondingly decreasing the "HW & Quiz" component above by 5%).
Introduction Overview of Futures, Forwards and Options: Hull 1.
Futures and Forward Markets
Futures and Forwards Mechanics, Pricing and Hedging Strategies: Hull 2, 3, 4, 5.
Interest Rate Markets and Futures: Hull 6 (We will actually cover this chapter at the end of the course).
Swaps: Hull 7.
Options Markets
Option Mechanics and Properties: Hull 8, 9.
Option Trading Strategies: Hull 10.
Option Valuation with Binomial Trees and Black-Scholes Model: Hull 11, 12.
Options and Greek Letters: Hull 15.
Additional topics as time permits
Exam Dates: (Please mark these days in your calendar now)
Midterm I March 10 Final Exam May 15; 8:00am-10:00am .