Derivatives

Summary

The derivatives market is perhaps the most important asset class. Even in a single day, on one exchange and market, trading volumes are huge. Understanding how these complex instruments are priced is important for understanding how risk can be managed. By studying this unit, you will acquire mathematical and analytical tools and problem-solving skills, which will be applicable in a wide range of disciplines and real-world situations. Moreover, knowledge of derivatives can open opportunities for further education and careers in fields that rely on mathematical modelling and analysis. Studying derivatives is also intellectually satisfying and can improve your ability to think critically and to solve complex problems.

Importance to your Programme

The unit complements other units on the degree. While derivatives will be introduced in core units, this unit will introduce further material and more challenging problems to deepen understanding. Moreover, as the unit is also available in MSc degrees in which derivatives has not been previously covered, a first principle thinking approach is adopted to promote inclusion.

Learning Outcomes

After completing this unit successfully, students should be able to:

• Analyse how financial derivatives are valued, and explain how these instruments can be used to implement risk management strategies.
• Critically discuss the practical usefulness of the Black-Scholes-Merton option pricing model.
• Appreciate the latest developments in derivative modelling and understand the latest problems in pricing complex derivatives.

Content

The unit will be divided into three sections, each covering a particular type of derivative. The sections will cover forwards and futures, swaps, and options. The bulk of content will be contained in the final section such that an in-depth analysis of options will be undertaken.