Hull Fundamentals of Futures and Options Markets UNIVERSITY OF WISCONSIN Finance 330 DERIVATIVE SECURITIES Spring

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Hull Fundamentals of Futures and Options Markets UNIVERSITY OF WISCONSIN Finance 330 DERIVATIVE SECURITIES Spring Powered By Docstoc
					                             UNIVERSITY OF WISCONSIN
                          Finance 330: DERIVATIVE SECURITIES
                                       Spring 2007
                       Monday and Wednesday, 11:00-12:15 and 1:00-2:30

Professor:        Dr. Toni Whited                              Office:     5289 Grainger
E-mail:                          Phone:      (608)262-6508
Office Hours:     MW 4:00-5:00 p.m. and by appointment         Fax:        (608)265-4195

Course Description

This course covers the trading, structure, and pricing of options, forward contracts, futures
contracts, and swaps. By the end of this course you will have a good knowledge of how these
contracts work, how they are used, and how they are priced. Individuals who are skilled at
analyzing derivatives are in great demand in New York, London, and other financial centers
throughout the world. If successful, they can command very high salaries within a few years of
graduating. Also, more and more corporations are hedging or using derivatives theory to value
capital budgeting projects. As such, people with a good knowledge of derivatives are in high

Required Background

Finance 300: Introduction to Finance
Math 213 or Math 222: Calculus
Gen Bus 304, Econ 410, or Stat 333: Statistics, which can be taken concurrently

Textbook and Course Materials

The textbook is Fundamentals of Futures and Options Markets, 5th Edition, by John C. Hull. I
suggest that you buy the book, but I have put a copy on reserve at the Business Library.

The web page for this course is All available
class materials are posted on the site. In particular, the site contains the lecture notes for the
course. You should print these out and bring them to class. You should check the website daily,
and it should be the first place you want to look for course related information, or if you have
questions regarding assignments.

You may purchase the optional Solutions Manual and Study Guide for this text at, for example,

Friday Discussion Sections and Teaching Assistant

Fei Li is the teaching assistant for this course. Her office hours are 3:00 to 4:00 p.m. on Tuesday
and Thursday in Room 1200G Grainger. She will hold discussion sections on February 10,
March 3, April 7, and April 28 in order to go over the problem sets. She will grade the exams,
the quiz, and the homework. I will grade the case study.

Course Conduct

Students are obviously required to adhere to the standards of academic integrity set forth in the
University of Wisconsin–Madison student code of conduct, which can be found at


There will be three homework assignments, one case study, and two in-class exams:

Homework           20%
Case Memo          15%
Case Quiz          5%
Exams              60%

The final course grade will be determined by one of two methods, depending on which is more
favorable to the students. The first is a straight scale in which 95-100% corresponds to an A, 90-
94% corresponds to an AB, and so on. The second will be a curve in which approximately 30%
of the students receive an A or an AB, 45% receive a B or a BC, and 25% receive a C or below.

Exam Policies

•   All exams will be closed book and closed notes. You may only bring pens, pencils, erasers,
    and a calculator.
•   Exam content will be based on assigned problems and examples in the class handouts.
•   I will provide you with a list of useful formulas. You may not make your own list. I
    recommend that you memorize the formulas anyway. The exams are sufficiently challenging
    that having to look up formulas will make it difficult for you to finish.
    BREAK! DO NOT LEAVE EARLY!!! If you leave early, you will receive no points for
    the exam.
•   If you are caught cheating on an exam, you will receive a score of zero for the exam.
•   The exams must be taken at their scheduled times, unless you have a verifiable family or
    medical emergency. These include operations, other hospitalizations, and deaths of close
    relatives. They do not include garden-variety colds, minor injuries, or vacations. If you
    attempt to falsify an excuse, you will receive a zero for the exam.
•   All requests to have an exam re-graded must be submitted to me in writing within one week
    after I hand back the exams. At that point I will re-grade the entire exam. No oral requests

   will be taken, and please do not ask for a preliminary assessment of whether a re-grade will
   be successful. I photocopy approximately 50% of all exams.

Homework Assignments

I will assign four problem sets. You may work on the assignments with a partner if you choose.
Larger groups are not permitted. If you work with another student, please submit only one copy
of your solutions, with both students’ names and lecture numbers appearing at the top.
Homework should not be done in consultation with students who are not members of your group.

Problem sets are due by 5:00 p.m. on the due date. If you do not hand them in during class, you
should slip them under my office door or put them in my mailbox on the fifth floor. No late
problem sets will be accepted, but I will drop the lowest of the four scores. This policy gives you
substantial flexibility in case you have a bad week.

Problem sets will be graded on a √, √+, √- system, in which a √+ is worth 3 points, a √ is worth 2
points, and a √- is worth one point. A √+ indicates that all of the problems were attempted and
that most or all were completed correctly. A √ indicates that all of the problems were attempted
and only approximately half were answered correctly, or that most of the problems were
attempted and that all of these were answered correctly. A √- will be earned if the criteria for a √
are not met. The final composite homework grade will be scaled proportionally so that 3 √+’s
equal 100% and failure to turn in any problem sets at all equals 0%.

Case Studies

For the case study you must complete a three-page memo. The case study must be done in
groups of two to four members. No late case memos will be accepted. The format of the case
write-up should be as follows:

Executive summary: here you briefly describe the situation, the key questions you address, and
short answers to these questions. Remember that if I ask you six questions, probably not all of
them are key questions.

Body of the write-up: here you give a more detailed description of the situation and explain how
you arrived at the answers to all the questions I posed. If you believe I have left out an important
question, try to formulate it yourself, and, if possible, try to answer it.

Appendix: this contains relevant exhibits and calculations that support your analysis. You should
only include exhibits that you explicitly mention in the main text, and you should clearly indicate
what information each exhibit provides. Do not forget to add titles.

General Guidelines:

   1. The entire write-up should be no more than three pages excluding the appendix, and no
      more than six pages including the appendix. The case write-up should be single-spaced
      and typed in 12-point type with one inch margins. I will be very strict on this: if you

       hand in more, I will only consider the first three pages of the written material and the first
       three pages of the appendix. The reason to be strict is that I want you to learn to
       formulate your thoughts in a concise manner. Chances are that your future boss will only
       read the first page and glance through the rest.

   2. It is not necessary to summarize the case situation in your write-up. Summarizing
      the case is the most effective way to do poorly on the case. Do not, however, assume
      that I know every single number and detail. Use your best judgment on how much of the
      case to include in your write-up, but remember that no more than one short paragraph is

   3. The second most effective way to do poorly on the case is to regurgitate the contents of
      the class notes or the textbook. You need to apply the concepts you have learned to the
      situation in the case.

   4. Most importantly, you must take a position regarding the problem in the case and make
      specific recommendations on how to solve it. Support your recommendations as
      succinctly and as effectively as you can.

Attendance and Class Participation

You are expected to attend all class meetings. This is the most efficient way to do well in this
course. Although class attendance and participation do not count formally towards your grade, I
will consider them in borderline cases. Please let me know in advance if you will not be able to
attend class. Note that you are still responsible for learning the materials covered in all class
meetings, and your assignments are due on the announced dates. How useful this course is to you
will depend not only on what I teach you, but also on your dedication, hard work and class
participation. To this end, I will expect you to observe the following norms:

      Come to class on time and stay the entire duration. Late arrival and early departure
       without my explicit prior approval are not acceptable.
      Please turn off mobile phones during the duration of the class. If you are interviewing,
       recruiters will understand that they cannot reach you when you are in class. If some
       emergency requires you to leave your cell phone on, please let me know before the class
      Ask questions whenever something is not clear. It takes time to learn new concepts, and
       asking questions helps. I view no question as “stupid.”
      Participate actively in class lectures and case discussions. This way you will get the most
       out of this course. I will systematically cold call on groups and individuals; so read the
       assigned material before you come to class.
      Please prepare a legible name card and put it up in front of you during every lecture.

Course Outline

Date                     Topic                                          Read   Do
Wednesday, January 18    Introduction                                   Ch. 1
Monday, January 23       Mechanics of Futures Markets                   Ch. 2
Wednesday, January 25    Hedging with Futures                           Ch. 3
Monday, January 30       Hedging with Futures                           Ch. 3
Wednesday, February 1    Interest Rates and Bonds                       Ch. 4
Monday, February 6       Interest Rates and Bonds                       Ch. 5  Homework 1
Wednesday, February 8    Pricing Futures                                Ch. 5
Monday, February 13      Pricing Futures                                Ch. 6
Wednesday, February 15   Interest Rate Futures                          Ch. 6
Monday, February 20      Interest Rate Futures                          Ch. 7
Wednesday, February 22   Swaps                                          Ch. 7
Monday, February 27      Swaps                                          Ch. 7  Homework 2
Wednesday, March 1       Review                                         STUDY!
Monday, March 6          Exam                                           STUDY!
Wednesday, March 8       Options Markets                                Ch. 8
Monday, March 20         Properties of Options and Options Strategies   Ch. 9
Wednesday, March 22      Options Strategies                             Ch. 10
Monday, March 27         Case: Liability Management at GM                      Case Memo
Wednesday, March 29      Binomial Trees                                 Ch.11
Monday, April 3          Binomial Trees                                 Ch.11
Wednesday, April 5       The Black-Scholes Model                        Ch. 12 Homework 3
Monday, April 10         Options on Indices and Currencies              Ch. 13
Wednesday, April 12      Futures Options                                Ch. 14
Monday, April 17         The Greek Letters                              Ch. 15
Wednesday, April 19      The Greek Letters                              Ch. 15
Monday, April 24         Case: Leland O'Brien Rubinstein                       Case Quiz
Wednesday, April 26      Value at Risk                                  Ch. 18 Homework 4
Monday, May 1            Review                                         STUDY!
Wednesday, May 3         Exam                                           STUDY!

                        Links to Exchanges and the CFTC

   Commodity Futures Trading Commission The regulatory
    agency for futures and options markets. Includes data on futures open interest.
   CBOT: The Chicago Board of Trade A great site for those
    interested in a myriad of futures information - traders, students, and researchers. It
    has 10 minute delayed quotes; a wealth of links to analysis firms, information
    sources, reports, associations, data; a nice picture of the price board under "Market
    Plex"; abstracts of CBT research seminars. One may also obtain a “Quicktime
    movie" of the Agricultural Trading Floor.
   CME: Chicago Mercantile Exchange It includes products,
    current and historical prices, seat prices, and futures/options on futures expiration
    dates. It also includes ten minute "Flash Quotes." Note the "News Center" for new
    information - and the "frequently asked question" section. There is also information
    on GLOBEX (after hours trading system), performance bond (margin) and the
    SPAN risk requirements. The section on "Do you have a future in futures?"
    provides a description on exchange jobs and their responsibilities, as well as firms
    who regularly trade futures.
   CBOE: Chicago Board Options Exchange The original
    options exchange. It gives bid and ask prices, and volume and open interest. It
    provides a "virtual visit" of the trading floor. Visit the structured products area.
   LIFFE: London Futures Exchange It provides some
    interesting historical graphs and statistics for LIFFE contracts. Provides all of the
    bid, ask, and trade pries for LIFFE contracts and corresponding volumes for the
   AMEX: American Stock Exchange (option products) AMEX options and discussion of their
    products. Especially look at their new/innovative products in the emerging markets
    area and the structured derivatives section.
   Kansas City Board of Trade An agricultural exchange for
   The Coffee, Sugar, and Cocoa Exchange It shows how these
    markets work, including examples of hedging and tactics.
   Philadelphia Stock Exchange The primary exchange for
    trading foreign currency options.

Please answer the questions below, sign the statement on the bottom, and return the completed
form to me by 5:00 p.m. on Wednesday January 25th. This sheet will count for the first problem
in the first homework. Thanks!

   1. How would you like to be addressed?

   2. What is your e-mail address?

   3. What is your home country?

   4. What is (are) your major(s)?

   5. When do you expect to graduate?

   6. Please attach a photograph on the back. A copy is fine, as long as it is clear.

   7. Are you currently taking Gen Bus 304 or an equivalent statistics course? If not, when did
      you complete the stats requirement for this course, and which course did you take?

   8. What do you hope to learn in this class?

It is essential that all students clearly understand the course requirements at the beginning of the
semester. Please read the syllabus carefully before signing the statement below.
I have read the syllabus for Finance 330 carefully and I agree to the terms of the course.

Name (please print) ____________________________________________________

Signature ____________________________________________________________

Student ID Number ____________________________________________________

Date ________________________________________________________________

Lecture # ____________________________________________________________


Description: Hull Fundamentals of Futures and Options Markets document sample