Financial Derivatives

CB1. Financial Calculations

CB2. Financial Institutions and Markets

CB3. Spot Market Financial Instruments

Course teaching is grounded in theoretical-practical classes and a direct connection to real-market dynamics. The course pedagogy is highly interactive and oriented towards active student participation through debate and practical problem-solving.

ME1. Theoretical presentation and real-world case analysis: presentation of the proposed contents, accompanied by the study and discussion of an extensive range of national and foreign real-world case studies.

ME2. Exercise solving and in-class checking: content delivery followed by questions and practical exercise solving by students during class.

ME3. Class discussion and debate: critical analysis and participatory debate on proposed topics and solutions, promoting interactivity in the classroom.

Learning Outcomes (LO):

LO1. Distinguish the nature, functioning, and risk/return profiles of the main financial derivative instruments.

LO2. Interpret deposit interest rates and fixing rates, and calculate implicit exchange rates and swap points.

LO3. Analyze the characteristics of forward and futures contracts, and determine the theoretical price and value of these contracts.

LO4. Understand the structure and functioning of swap operations (interest rate and currency) and calculate their cash flows.

LO5. Distinguish European, American, and exotic options, identifying their key value determinants.

LO6. Calculate and graphically represent the payoff profiles of simple and combined option positions.

LO7. Decompose the price of an option into intrinsic value and time value.

LO8. Analyze the put-call parity relationship and devise arbitrage strategies in cases of price imbalance.

LO9. Apply the main quantitative option pricing models (such as the Binomial Model and Black-Scholes-Merton).

LO10. Formulate and evaluate hedging, speculation, and arbitrage strategies using various derivative instruments.

Competencies to be Developed (CD):

CD1. Analysis and Characterization of Derivative Instruments: Ability to identify, differentiate, and compare the structural characteristics, mechanics, trading rules, and risk/return profiles of forwards, futures, swaps, and options (including exotic options).

CD2. Financial Valuation and Contract Quantification: Ability to apply financial and mathematical techniques to determine the theoretical price and market value of forward contracts, futures, swaps, and options, using appropriate valuation models (such as the Binomial Model and the Black-Scholes-Merton model).

CD3. Monetary Calculation and Foreign Exchange Operations: Ability to interpret and calculate deposit interest rates, benchmark rates (fixing), implicit exchange rates, and swap points, linking them to money and foreign exchange market mechanics.

CD4. Value Decomposition and Graphical Representation: Ability to decompose option value into intrinsic and time components, as well as construct and graphically interpret payoff and profitability profiles for simple and combined derivative positions.

CD5. Identification and Exploitation of Arbitrage Opportunities: Ability to analyze the put-call parity relationship and market equilibrium conditions to identify price inefficiencies, designing and executing risk-free arbitrage strategies.

CD6. Design of Risk Management and Speculation Strategies: Ability to design, implement, and evaluate risk hedging strategies (currency, interest rate, or asset price), as well as construct speculative positions tailored to specific risk profiles and market outlooks.

P1. The derivatives market

P2. Futures markets

P3. Forward Contracts

P4. Interest rates used as underlying in derivatives

P5. Exchange rates used as underlying

5.1 Foreign exchange market: exchange rate formation

5.2 Cross Rates

5.3 Swap points

P6. Swap transactions

6.1 Characteristics and operation of swap operations;

6.2 Interest rate swaps;

6.3 Currency swaps;

P7. Curve analysis

7.1 Interest rate curves

7.2 Credit Spread Curves and Basis Spread Curves

7.3 Introduction to the concept of volatility curves

P8. Options markets

8.1 Risk and profit profile. Market organization and operation.

8.2 Option prices: determinants; arbitrage restrictions; put-call parity.

8.3 Hedging and speculation strategies: options algebra; results profiles.

8.4 Option Valuation Models: Binomial Model, Black & Scholes Model, Dividend Effect and Merton Model.

8.5 Options and financial innovation: structured products and exotic options

A. DISTRIBUTED ASSESSMENT

MA1. Completion and presentation of 2 group assignments (ASSIGNMENT1 and ASSIGNMENT2) on the topics studied, each weighted at 5.0 marks;

MA2. Final exam weighted at 10 marks (Regular and Resit exam periods);

The assignments mentioned in MA1: i) must take the form of a discussion on relevant articles from the financial literature, in accordance with the methodology to be provided in the first class; ii) must be completed in groups, preferably composed of 3 students; iii) must be presented and discussed during the three scheduled classes, depending on the number of students enrolled in this evaluation mode; iv) must be submitted in written form, with a target length of 10 pages each, and delivered by the date of the final exam.

AI Usage Guideline: Permitted as a support tool (research, proofreading, formatting). Students must attach the mandatory AI usage declaration, including a list of prompts used and a record of their own critical intervention.

RELEVANT NOTES:

1. Access to this evaluation mode is conditional upon attendance of at least 80% of classes. An exception is made for Working-Student status, which must be officially proven to Academic Services.

2. No oral exams will be conducted in any of the scheduled exam periods;

3. Assignment grades remain valid for both the Regular and Resit exam periods; completing assignments exclusively for the Resit period is not permitted.

4. This evaluation mode requires a minimum grade of 8 marks (on a scale of 0 to 20) on the final exam.

Final Grade Formula: FG = ASSIGNMENT1 + ASSIGNMENT2 + EXAM

B. FINAL EVALUATION

MA3. Through a final examination, in accordance with the regulations set out in the ISCAC Undergraduate Degree Regulations. Students who obtain a grade of no less than 9.5 marks will pass the module. The written examination will cover the entire syllabus and last for 2 hours.

AI Usage Guideline: Level 0 (No AI allowed)

Important Note: Students who opt for assessment method A) and fail to obtain an overall final grade of 10 marks or above may sit the examination during the regular exam period under assessment method B).

NAO