Futures and Options

The student should have Finance notions on financial market functioning.

Classes are based on a theoretical-practical approach, and the exposure of contents is accompanied by a wide range of real cases, both national and foreign.  There will be also a contents exposure followed by questions which will be discussed and brainstormed.

Objectives:

At the end of the course, the student should know: To distinguish the fundamental characteristics of the several derivatives; (ii) to determine the value oif a futures’ contract; (iii) to explain the arbitrage and its role in pricing determination and in markets balance; (iv) to understand and apply the headging and speculation strategies; (v) to describe the basics of a forwards contracts; (vi) to distinguish a futures contract from a forwards contract; (vii) swap operations characteristics and functioning; (viii) interest rate swap; (ix) currency swaps; (x) describe the basics of an options’ contract. Distinguish european from american options. To distinguish types of options according to their underlyings. Calculate and interpret the options payment profiles ; (xi) define intrinsic value and time value and explain its relation. To explain how the options price is affected by the strike and the time to mature. To explain the put-call parity and its relation with the hedging strategies and synthetic options; (xii) to recognise and apply the main option pricing models; (xiii) to identify and explain exotic options; (xiv) to use hedging and speculation strategies with options.

Skills:

At the end of the course unit, the student should be able to: Identify markets and financial instruments and describe their functions and main characteristics.

 1. Futures market

1.1 Fundamental characteristics of futures market.

1.2 Organisation and functioning of the Main Derivatives Market

1.3 Main futures contracts Identification

1.4 Futures valuation

1.4 Hedging

2. Forward Contracts

2.1 Basic characteristics of a forwards contract.

2.2 Credit risk of a forwards contract.

2.3. Main differences between a futures contract and a forward contract

3. Swap Operations

3.1 Characteristics and functioning of swap operations

3.2 Interest rate swap;

3.3 currency swaps;

4. Options Market

4.1 Introduction. Risk profile and results. Market organization and functioning.

4.2 options price; determinants; arbitrage restrictions; put-call parity.

4.3 Hedging strategies and speculation; options algebra; results profile.

4.4 Options Valuation Models: Binomial Model (one period, multi-period and application to American options; Black & Scholes Model; Dividends Effect (American call – Black approach) and Merton Model (Fx Options) .

4.5 Options and Financial Innovation: structured products and exotic options.

NAO

FUNDAMENTAL

Hull, J. C. (2021), Options, Futures and Other Derivatives, 11th edition, Pearson.

COMPLEMENTARY

Ferreira, Domingos (2019), Swaps e outros derivados, Gestão de Risco, Especulação e Arbitragem, Rei dos Livros

Bodie, Kane and Marcus (2014), Investments, Global edition

Ferreira, Domingos (2009), Opções Financeiras, Gestão de Risco, Especulação e Arbitragem, Edições Sílabo

Pinho, Carlos & Soares, Isabel (2008), Finanças, Mercados e Instrumentos, Edições Silabo

Bjork, T. (2004), Arbitrage Theory in Continuous Time, 2nd edition, Oxford University Press.

Shreve, S. E. (2004), Stochastic Calculus for Finance II: Continuous-Time Models, Springer.