FISHER COLLEGE OF BUSINESS OPTIONS AND FUTURES I Business Finance 4230 Fall 2015 (Session I) Instructor : Office: 242 Fisher Hall Phone: 688-1289 Fax: 292-2418 E-mail: Web Page: pirim.1@osu.edu Carmen Class Times and Rooms: Tue / Thu 9:35 am - 10:55 am, Schoenbaum Hall 220 Tue / Thu 12:45 pm - 2:05 pm, Schoenbaum Hall 300 Office Hours: Tuesdays 11:00 am 12:00 pm or by appointment Textbook : McDonald., R., Derivatives Markets, Third Edition, 2013 Pearson, ISBN-10: 0-13-611766-7 Course Description: Financial derivatives have become an indispensable part in today s economy. Examples are stock options, oil futures, currency contracts, credit derivatives and much more. They are used for compensation, speculation, yield enhancements of investments, and, most importantly, for risk management. Since every company is exposed to some sort of risk, there is virtually no company that does not deal with derivatives in some way. Hedge Funds often play the counterpart to the companies by investing in these derivatives and thereby redistributing their market risks. Hedge funds have experienced explosive growth over the last two decades. Financial derivatives are not uncontroversial. While former Federal Reserve chairman Alan Greenspan has called them engines of the economy, billionaire investor Warren Buffet has famously declared them weapons of mass destruction. The purpose of this course is to give an overview of the fundamentals of derivatives. It focuses on the typical derivates products available: forwards, futures, and options. For each type of derivates we will consider how it could be used both in risk management settings as well as for speculations. We will look at how to calculate crucial details for each contract, such as the value of an option and the fair futures prices. These calculations are all based upon the principle of no arbitrage and although they can often be complex, our emphasis will be on a basic understanding on the methodologies involved and on applying these methodologies rather rigorous proofs of derivatives. 1
The course starts with a general look at using futures and options to hedge exposure to different types of risk. We then analyze each of the main types of derivatives in turn, starting with forwards and futures moving on to options. This analysis will use no arbitrage arguments to determine how to construct a fair contract between the parties involved and how to value this contract as time and the value of the underlying asset change. As a side effect of the no arbitrage arguments we also construct arbitrage strategies to take advantage of any mispriced derivate products. Upon completion of the course you should have a good grasp of the practical uses of derivate contracts as well as being able to calculate key parameters for each. Lecture Notes: There will be lecture notes for each class. Each week, copies of these lecture notes will be available via CARMEN. Lecture notes and any other reading materials will be posted in the form of MS Word files, MS Power Point files, and/or *.pdf (Adobe Acrobat) files. It is your responsibility to print them out before each class. You are responsible for all material covered in class. Lecture may go beyond the scope of the textbook for certain topics. Therefore, it is important for you to attend class. You are responsible for all announcements made in class. Class lectures will sometimes involve working through problems. Thus, you are required to bring a calculator to every class so that you may work on problems and participate in class discussions. Office Hours: Tuesdays 11:00 am 12:00 pm or by appointment I will always be in (I may have stepped out but only for 5-10 minutes) at these times. I have an open door policy at other times, but it s wise to call (614) 688 1289 just before if you intend to come by outside of these posted hours. Dial-a-Question: Call 688-1289 for answers to brief questions: I might be able to save you some time in making a trip in to campus. E-mails: When sending e-mail, please use pirim.1@osu.edu and make sure you write BUSFIN 4230/Options and Futures I for the subject section and do avoid hitting Reply to All button to a general e-mail that I have sent to all students, for obvious reasons. Course Grading Policy: Your final course grade will be determined by the following: Assignment or category Points Percentage of total grade Exam I 100 points 30 % Problem Sets (Total 4) 100 points 20 % Final Exam 100 points 50% See course schedule, below, for due dates Total Course Grade = 0.5 x (Final Exam Grade) + 0.3 x (Exam I Grade) + 0.20 x (Problem Sets) After the total course grade has been calculated for all students, the average for the class is calculated. If the course class average is below 75%, a curve adjustment is applied. The curve adjustment equals 75% minus the course class average. If the course class average is equal or above 75%, a curve adjustment is not applied (that is curve adjustment is zero). 2
The course grade will be converted to a letter grade for the course using the following grading scale: Grading scale: A 93 100 B+ 87 89.9 C+ 77 79.9 D+ 67 69.9 E Below 60 A- 90 92.9 B 83 86.9 C 73 76.9 D 60 66.9 B- 80 82.9 C- 70 72.9 Prof. Pirim reserves the right to correct grades recorded on the course website, should she determine such entries were posted incompletely or incorrectly. Exams: There will be one mid-session exam and one comprehensive final exam. Students should bring to each exam: 1. A financial calculator 2. A valid picture ID. You will not be permitted to take an exam without presenting a valid photo ID. 3. Several #2 pencils, which you will need for the bubble sheet All exams are closed book/notes. Except for a Formula Sheet provided by the proctor, students may not use any reference material to help them answer exam questions. Students will be given scrap paper at the exam. No student is permitted to use his or her own scarp paper. Exam rules: You should be in your seat 5 minutes before the exam starts. All electronic devices other than your calculator must be turned off and put away during exams. All other course materials must be out of sight. All hats and hoods must be off your head. Your exam grades will be posted on Carmen. Exams are NOT returned to the students, but you may view your exam during office hours. Petition for Exam Re-Grading: If a student believes his or her exam was not graded correctly and wants a question re-graded, the students must submit a request to Prof. Pirim in writing (must be submitted as an attached document in an email). The request must be received no later than ten (10) days from the date of the exam in question. The request should be carefully explain why the student wants his or her exam re-graded. Make-up Exams / Scheduling Conflicts: As a general rule, make-up exams are NOT given in this course. However, a student may be allowed to take a make-up exam, if in the opinion of the instructor, there are special or extenuating circumstances. Without permission to take a make-up exam, failure to take an exam will result in grade of zero on the exam in question. Every effort should be made (e.g. email, voicemail, message with the Finance Department Office) to notify the instructor at least 24 hours in advance. Under no circumstances will a student be excused from an exam. If you have a conflict with an exam date, you MUST let me know as soon as possible at most within the first two weeks. I will not reschedule an exam due to conflicts at the last minute. Participation and Attendance: You are strongly encouraged to participate in this class. I encourage you to ask questions and participate in discussions. This makes lecture more interesting. I also encourage you to give me any suggestions that you have about improving the course. The attendance will be taken at every class. If you do not miss more than one class then you will be eligible for an extra 1 point towards your overall grade. As a matter of professional courtesy, I expect an email or phone message, if you are unable to attend class. 3
It is expected that students treat others, their ideas, and their time with respect by arriving class on time. Please mute phones, laptops, tablets and any other electronic devices. Laptops and tablets are permitted in class to be used ONLY for note taking and in-class assignments. I also wanted to remind that The University and College expectation is that students spend two hours outside of class for every hour spent in class. Since this course meets almost 3 hours per week, you should expect to spend around 6 hours per week outside of class on course-related work. Academic Integrity Policy: The Ohio State University s Code of Student Conduct (Section 3335-23-04) defines academic misconduct as: Any activity that tends to compromise the academic integrity of the University, or subvert the educational process. Examples of academic misconduct include (but are not limited to) plagiarism, collusion (unauthorized collaboration), copying the work of another student, and possession of unauthorized materials during an examination. Ignorance of the University s Code of Student Conduct is never considered an excuse for academic misconduct, so I recommend that you review the Code of Student Conduct and, specifically, the sections dealing with academic misconduct. If I suspect that a student has committed academic misconduct in this course, I am obligated by University Rules to report my suspicions to the Committee on Academic Misconduct. If COAM determines that you have violated the University s Code of Student Conduct (i.e., committed academic misconduct), the sanctions for the misconduct could include a failing grade in this course and suspension or dismissal from the University. If you have any questions about the above policy or what constitutes academic misconduct in this course, please contact me. Accommodations for Accessibility: Requesting accommodations If you would like to request academic accommodations based on the impact of a disability qualified under the Americans with Disabilities Act and Section 504 of the Rehabilitation Act of 1973, contact your instructor privately as soon as possible to discuss your specific needs. Discussions are confidential. In addition to contacting the instructor, please contact the Office for Disability Services at 614-292 3307 or ods@osu.edu to register for services and/or to coordinate any accommodations you might need in your courses at The Ohio State University. Go to http://ods.osu.edu for more information. Class Schedule: The following describes the tentative class schedule. The topics covered on each proposed week may change as the semester progresses, but the general order will not vary. Students are strongly urged to read the appropriate chapters BEFORE the lecture so as to learn more during the lectures. Table 1: Assessment Timetable Detail Date Issued Due Date Problem Set 1 September 8 th, Tuesday September 15 th, Tuesday Problem Set 2 September 15 th, Tuesday September 22 nd, Tuesday Problem Set 3 September 22 nd, Tuesday September 29 th, Tuesday Problem Set 4 September 29 th, Tuesday October 6 th, Tuesday 4
Table 2: Tentative Lecture Timetable Date Subject Reading Week 1 (August 25 th & 27 th ) Introduction to Derivatives/ Forwards and Options Syllabus and McDonald Ch.1 Week 2 (September 1 st & 3 rd ) Forwards and Options McDonald Ch. 2 Week 3 (September 8 th & 10 th ) Insurance, Collars, and Other Strategies McDonald Ch.3 Week 4 (September 15 th & 17 th ) Insurance, Collars, and Other Strategies Introduction to Risk Management McDonald Ch. 3 McDonald Ch. 4 Week 5 (September 22 nd, Tuesday) Introduction to Risk Management Review for the Exam McDonald Ch. 4 EXAMINATION Week 6 (September 29 th & October 1 st ) September 24 th, Thursday Smith Lab 1009 (SM 1009) From 6:00 pm to 7:30 pm Financial Forwards and Futures McDonald Ch. 1-4 McDonald Ch. 5 Week 7 (October 6 th & 8 th ) Financial Forwards and Futures Binomial Pricing I McDonald Ch. 5 McDonald Ch. 10 FINAL EXAMINATION October 13 th, Tuesday TBA McDonald Ch.1-5 & 10 GOOD LUCK! 5