SCHOOL OF BUSINESS ADMINISTRATION
SYLLABUS
(SPRING 2002)
SPECULATIVE MARKETS
(MB 76)
Instructor:
Dr.
D.K. Malhotra
Office:
15
Gibbs Hall
Office Phone:
(215)
951-2813
E-mail:
Malhotrad@philau.edu
Web Address:
http://faculty.philau.edu/MalhotraD
Office Hours:
12:00
noon - 1:00 PM Tuesday and Thursday or by appointment.
Required Text:
An Introduction to Derivatives
and Risk Management by Don M. Chance, 5th edition, Dryden Press, 2000.
Additional
Recommended Readings:
The Wall Street Journal
Barron’s Paper
Course
Description: This
course will provide an overview of the financial futures, options and swaps.
Areas covered will include a discussion on various types of options,
futures, and swap contracts in use in financial markets, and use of these
securities to manage risk. Most of
the material will be discussion oriented.
Course
Objective:
This course is intended to introduce the MBA students to financial futures,
options, and swaps. The objective
of this course is to clearly explain why these securities exist, where and how
they are traded, how to employ them to manage risk, and how to accurately price
them. The course will present a
balance of the institutional details, theoretical foundations, and practical
applications of this field. It will
provide information students need to embark on a career in speculative markets.
Prerequisites:
All students must have completed MB 29 and MB 72.
It is the students' responsibility to make certain that they have
successfully completed these courses. If
at any time during the semester it is learned that a student has not
successfully completed these prerequisites, he/she will be dropped from the
course receiving, neither credit nor tuition refunds.
Requirements:
1.
Attend class regularly.
2.
Do Class Assignments.
3.
Study class notes prior to next class and come prepared to the class to
participate actively in discussions.
4.
Be able to take time pressure tests.
Attendance:
Attendance
is mandatory. You are responsible
for what is covered in the class and any absence on your part leaves you
responsible for finding out what was presented in class.
You will benefit a lot from the course by doing problems and reviewing
concepts that are covered in the class.
Grading:
Homework
Assignments and Case Studies 30%
Mid-term
Exam
35%
Final
Exam
35%
No late homework will be accepted. No makeup exams will be
given. If you miss an exam due to an unavoidable reason, the grade on the missed
exam will be transferred to the final exam.
THE FINAL EXAM IS COMPULSORY AND COMPREHENSIVE.
DO NOT EXPECT ANY SCALING ON THE GRADES.
Academic Honesty:
Students are expected to perform according to a code of academic
honesty that prohibits cheating on tests and plagiarizing others' work.
Violation of this code may result in failure of the course.
Grading Policy:
The
following policy will be followed for assigning letter grades in this course.
93
and above A
90
- 92
A-
87
- 89
B+
83
- 86
B
80
- 82
B-
77
- 79
C+
73
- 76
C
70
- 72
C-
Less
than 70
F
Tentative Course Outline:
01/18 An Introduction to Options, Forward, and Futures
Markets (Chapters 1)
The Concept of Derivatives
Futures and Forward Contracts
Options
Other Exotic Products
Participants
01/18
The Structure of Options Markets (Chapter 2)
Types of Options
Option Positions
Characteristics of Option Contracts
01/25 Principles of Option Pricing (Chapter 3)
Factors affecting Option Prices
Upper and Lower Bounds for Option Prices
Early Exercise of Calls and Put Options
Put-Call Parity
The Effect of Dividends
02/01 Option Pricing Models--Binomial Option Pricing Model
(Chapter 4)
One Step Binomial Model
Two Step Binomial Model
The Concept of Delta and Risk Free Portfolio
02/08 Option Pricing Models--Black-Scholes Option Pricing
Model (Chapter 4)
Assumptions underlying Black-Scholes
The Black-Scholes Analysis
Implied Volatility
Sensitivity of Individual Options
Dividends
02/15 Option Pricing Models (Chapter 4)
02/22
Basic Option Strategies (Chapter 5)
Stock Transactions
Call Option Transactions
Put Option Transactions
An Option and a Stock
02/29
Advanced Option Strategies (Chapter 6)
Spreads
Combinations
Other Payoffs
03/08 Mid-term Exam
No Class Due to Asia Trip
03/22 Advanced Option Strategies
03/29
The Structure of Futures Markets (Chapter 7)
The Specifications of the Futures Contract
Convergence of Futures Price of Spot Price
The Operation of Margins
04/05
Principles of Spot and Futures Pricing (Chapter 8)
Properties of Forwards and Futures Prices
Forward versus Futures Prices
A Forward and Futures Pricing Model
04/12
Futures Hedging Strategies (Chapter 9)
Determination of Hedge Ratio
Minimum Variance Hedge Ratio
Duration-Based Hedging Strategies
Treasury Bond and Treasury Note Futures
Stock Index Futures Hedge
Hedging Strategies
04/19 Futures Hedging Strategies
04/26
Swaps and the concept of Financial Engineering
Interest Rate Swaps
Variants of Interest Rate Swaps
Mechanics of Interest Rate Swaps
Currency Swaps
Variants of Currency Swaps
Mechanics of Currency Swaps
Next wave of Derivatives
Additional Recommended Reading:
1. An Introduction to Options, Forward, and Futures Markets
Hull,
John. Options, Futures, and Other
Derivative Securities, Chapter 1. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
2. The Structure of Options Markets
Hull,
John. Options, Futures, and Other
Derivative Securities. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
3.
Principles of Option Pricing
Hull,
John. Options, Futures, and Other
Derivative Securities. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
Stoll,
Hans R. “The Relationship between Put and Call Option Prices.” The Journal of Finance
31 May (1969): 319-332.
4. Option Pricing Models
Hull,
John. Options, Futures, and Other
Derivative Securities. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
Black,
Fischer. “Fact and Fantasy in the Use of Options.” Financial
Analysts Journal 31 (July-August 1975): 36-41, 61-72.
Cox,
John C., Stephen A. Ross, and Mark Rubinstein. "Option Pricing: A
Simplified Approach." Journal of Financial Economics 7 (September 1979): 229-263.
Hsia,
Chi-Cheng. "On Binomial Option Pricing."
The Journal of Financial Research 6 (Spring 1983): 41-50.
Black,
Fischer, and Myron Scholes. "The
Pricing of Options and Corporate Liabilities."
Journal of Political Economy 81
(May-June 1973): 637-659.
Smith,
Clifford W., Jr. "Option Pricing: A Review."
Journal of Financial Economics 3 (January-March 1976): 3-51.
Brennan,
Michael J., and Eduardo S. Schwartz. "The Valuation of American Put
Options." The
Journal of Finance 32 (May 1977): 449-462.
5. Basic Option Strategies
Galai,
Dan. “Characterization of Options.” Journal
of Banking and Finance 1 (December
1977): 373-385.
Grube,
R. Corwin, Don B. Panton, and J. Michael Terrell. “Risks and Rewards in
Covered Call Positions.” The Journal of Portfolio Management
5 (Winter 1979): 64-68.
Pounds,
Henry M. “Covered Call Options Writing: Strategies and Results.” The Journal of Portfolio
Management 5 (Winter 1978): 31-42.
Singleton,
J.Clay, and Robin Grieves. "Synthetic
Puts and Portfolio Insurance Strategies."
The Journal of Portfolio Management
10 (Spring 1984): 63-69.
6. Advanced Option Strategies
Hull,
John. Options, Futures, and Other
Derivative Securities. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
Frankfurter,
George, Richard Steveson, and Allan Young. “Options Spreading: Theory and
Illustration.” The
Journal of Portfolio Management 5
(Summer 1979): 59-63.
Silvka,
Ron. “Call Option Spreading.” The
Journal of Portfolio Management 7
(Spring 1981): 71-76.
8.
The Structure of Futures Markets,
Principles of Futures Pricing, and Futures Hedging Strategies
Hull,
John. Options, Futures, and Other
Derivative Securities. Englewood
Cliffs, N.J.: Prentice Hall, 1992.
Stoll,
Hans R. and Robert E. Whaley. Futures and
Options: Theory and Applications.
South-Western Publishing company, 1992.
Hull,
John. Introduction to Futures and Options
Markets. Prentice Hall, 1992.
9.
Swaps, Swaptions, Caps, Collars, and Floors and the concept of Financial
Engineering
Bicksler,
James and Andrew Chen. "An
Economic Analysis of Interest Rate Swaps."
Journal of Finance, July 1987.
Wall,
Larry D., and John J. Pringle. "Alternative Explanations of Interest Rate
Swaps." Financial Management 18 (Summer 1989): 59-73.
Evans,
John S. and D.K. Malhotra. “Understanding Cross-Currency Swaps.” The Banker’s
Magazine, March/April 1994.
McLeod,
Robert and D.K. Malhotra. “Emerging Trends in Interest Rate Swaps.” The Banker’s Magazine,
May/June 1993, 37-44.
Brooks,
Robert and D.K. Malhotra. “Components of Bid-Ask Spread in Default-Risky
Interest Rate Swaps.” Advances in Futures and s Option
Research, Volume 7, 1994, 237-249.
Malhotra,
D.K., and John S. Evans. “Exchange Rate Risk Management Using Cross-Currency
Swaps and Swaptions.” Journal of
Commercial Lending, July 1995.
Malhotra,
D.K. "Duration of a Cross-Currency Swap Contract and Exchange Rate and
Interest Rate Risk Management." Journal
of Multinational Financial Management, March 1996.