West Virginia University

College of Business and Economics

FIN 525 Derivative Securities
Fall 2009
Monday, 6:00-8:50 p.m., 240 B&E

Course Description: Derivative security markets are an extremely important, innovative and rapidly growing segment of financial markets. The notional value of outstanding derivative contracts is in the hundreds of trillions of dollars. Corporate treasurers and portfolio managers routinely use derivative securities for mitigating complex risks inherent in the financial markets. When used inappropriately, derivatives can be dangerous, as evidenced by several high-profile derivatives disasters and the role of credit derivatives in the recent financial crisis. This course examines valuation and use of futures, options and swaps. The structure of the course closely follows the derivatives portion of the CFA curriculum.

Course Objectives and Learning Outcomes: Upon successful completion of this course, the student will:

• Understand how derivative securities work and how they are traded.
• Understand the principles of derivatives pricing, including the implications of arbitrage.
• Be able to price forward and futures contracts using the cost of carry model.
• Be able to value interest rate swaps.
• Be able to value options using the binomial and Black-Scholes option pricing models.
• Be prepared to use derivative securities in financial risk management, speculation and arbitrage.
• Learn important lessons from derivatives disasters.

Prerequisites: An introductory finance course is the only formal prerequisite. I will assume that students know basic algebra, basic calculus and basic statistics, and are familiar with Excel.

Required Materials:

Options, Futures and Other Derivatives, 7^th edition by John Hull. Pearson/Prentice Hall, 2009.

The textbook is the main source of information for the course. I will make regular assignments from the text. The layout of the course requires that you complete the reading assignments prior to class. Your goal in reading must be true understanding of the material, not memorization. I expect you to come to class prepared for active participation.

Recommended Additional Reading:

• The Wall Street Journal or other financial newspapers.

• Risk Takers: Uses and Abuses of Financial Derivatives, 2^nd edition by John Marthinsen. Pearson Addison-Wesley, 2009.
• Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Taleb. Random House, 2008.

WVU eCampus: I will use WVU eCampus (https://ecampus.wvu.edu/) throughout the course to post announcements, classroom handouts and other class materials.

Course Activities:

• Homework Assignments: Suggested homework assignments from the textbook and/or from the Stalla CFA Study Guide will be posted on eCampus and should be completed, but do not need to be turned in. Working on these assignments will help you prepare for exams in this course, as well as the CFA exams. I encourage you to work as many additional practice problems from the book as possible.
• Excel Projects: The projects will involve valuation and use of derivative securities. The tentative due dates are shown on the course schedule. No projects will be accepted after the due date. You may work individually or in a group of two. Detailed instructions will be provided.

Regularly Scheduled Exams: There will be two midterm exams during the semester, tentatively scheduled for September 28 and October 26. The midterm exam dates will be confirmed at least a week in advance of the exam. A comprehensive final exam is scheduled for 6:00 p.m. on December 7. No make-up exams will be given except by prior arrangement with the instructor.

Class Break: The class runs from 6:00 to 8:50 p.m. every Monday. We will take a ten-minute break at or around 7:20 p.m. If I forget about the break, don’t hesitate to remind me.

Attendance: Regular attendance is important. Students who attend classes regularly tend to earn higher grades. Consistent with WVU guidelines, students absent from regularly scheduled examinations because of authorized University activities will have the opportunity to take them at an alternate time.

Determination of Grade: Your grade for the course will be determined as follows:

The final grade will be determined using the following scale: A: 90-100; B: 80-89; C: 70-79; D: 60-69; F: below 60.

Academic Dishonesty: Academic dishonesty in any form will not be tolerated.

Tentative Course Schedule

NOTE: The instructor reserves the right to change this syllabus as time and circumstances dictate. Necessary changes will be announced in class in advance when possible.

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