Syllabus
Part I: Futures contracts
1. Basic features of forward and futures trading: distinction between forward and futures contracts, practical arrangements (clearing house, operation of margins, marking to market, delivery process, trading limits), basis (contango, backwardation).
2. Examples of financial futures contracts: stock index futures, currency futures, short-term interest rate futures, long-term interest rate futures (price factor, CTD bond).
3. Model cost-of-carry: derivation of basic formula, valuation of futures contracts, fair pricing of futures contracts (covered and uncovered interest rate parity, implied forward rates).
4. Speculative trading strategies with futures: features of speculative trade (working of leverage), open position trading (long and short positions), spread trading (intra-contract spread, butterfly spread), basis trading.
5. Arbitrage trading strategies with futures: features of arbitrage trade, box arbitrage, conversion arbitrage.
6. Hedging trading strategies with futures: typology of hedging, hedging using spot transactions, basic elements of futures hedging (hedge ratio, hedge efficiency), basis risk, interpolative hedge, minimum variance hedge ratio, practical examples o hedging with futures. Part II: Options
6. Mechanics of option contracts (basic concepts, ice-hockey diagrams, practical aspects of option trading)
7. Examples of option contracts (stock option, currency option, interest-rate option, option on stock index)
8. Elements of option pricing (binomial model, Black-Scholesova formula, sensitivity analysis, put-call parity)
9. Option combinations (straddles, combinations, synthetic securities and others)
10. Trading using options (position and spread speculation, box arbitrage, hedging using options)
11. Exotic options (Asian, barrier, correlation, hybrid and others)
Annotation
The objective of the course is to provide a general knowledge about theoretical background and practical functioning of selected segments of financial markets, namely the futures and option markets. The stress is laid primarily on understanding the role of these instruments in managing financial risks and in speculative, hedging and arbitrage trading.
The summer semester offers the continuation of the course called Financial Markets Instruments II.