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ADM 4351
Options and Futures is a course that focuses on derivatives markets, risk-neutral valuation, option pricing models, option strategies, convertible securities and warrants, forward and futures contracts, index futures, and swaps. The main goal of ADM 4351 is to make students proficient with no-arbitrage pricing theory and enable them to apply it to various types of financial problems. Students will also be exposed to different types of financial instruments and learn how to correctly price them and use them to hedge financial risks.
✔ (Summary) What You Will Learn:
- Mechanics of Futures Markets: This topic delves into the fundamental structure and operation of futures markets. It encompasses the details of futures contracts, such as the underlying asset, delivery location, and delivery date. Additionally, it touches upon the daily settlement process and the role of exchanges in facilitating futures trading.
- Hedging Strategies Using Futures: The primary focus of this topic is on the utilization of futures contracts to hedge against price risks. It addresses both long and short hedges, with long hedges safeguarding against rising prices and short hedges guarding against falling prices. The concept of basis risk is also discussed, along with the use of tailing the hedge to account for daily settlement in futures contracts.
- Determination of Forward & Futures Prices: The factors influencing forward and futures prices are discussed, including the spot price of the underlying asset, the cost of carry, and the time to maturity. Contango and backwardation concepts, which describe the relationship between futures prices and spot prices, are also addressed.
- Options - Mechanics of Option Markets: This topic introduces the mechanics of option markets, including types of options (calls and puts), option contracts, and the process of trading options. The concept of option premiums and the factors that influence option prices are also covered.
- Properties of Stock Options: This topic explores the properties of stock options, such as intrinsic value, time value, and moneyness. Factors that affect option prices, including the underlying stock price, strike price, time to expiration, volatility, interest rates, and dividends, are also discussed.
- Binomial Tree: The binomial tree model, a discrete-time method for pricing options, is introduced. The construction of the binomial tree and its use in calculating option prices and hedge ratios are explained.
- Black-Scholes Model: This topic addresses the Black-Scholes model, a continuous-time model for pricing options. The assumptions and derivation of the model, as well as its limitations and extensions, are discussed.
- Futures Options: This topic explores options on futures contracts, which combine the features of both futures and options. The mechanics of futures options, their pricing, and their use in trading and hedging strategies are explained.
- Swaps: Swaps are introduced in this topic as financial contracts in which two parties agree to exchange cash flows or other financial instruments. Various types of swaps, such as interest rate swaps and currency swaps, are covered, along with their use in managing financial risks.
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