Course leader: Mary Elena Sánchez Gabarre
Course pre-requisite(s): Basic knowledge of financial markets and financial mathematics
Course Overview
The aim of this course is to provide a detailed description of financial instruments and the financial theory required to understand them. We discuss the uses of various instruments and the determinants of their value. In particular, we focus on the study of bonds and derivatives markets. We pay special attention to valuation models, the consequences of their use, and critical consideration of the advantages and disadvantages of each instrument or strategy in a specific context.
Learning Outcomes
• Explain what financial instruments are, how they are used, and how they are valued.
• Discuss the role and structure of financial markets and identify the characteristics of a well-run financial markets.
• Explain the relationship between bond pricing and present value.
• Define the relationship among a bond’s price and its coupon rate.
• Explain how bond prices are determined and why they change.
• Identify the tree major types of bond risk: default, inflation, and interest rate changes.
• Compare different bonds and measure their risk.
• Explain what derivates are and how they transfer risk.
• Distinguish between forward and futures contracts.
• Define put and call options and describe how to use them.
• Explain the basic stochastic processes.
• Explain the binomial model: practical applications
• Explain the Black-Scholes model: practical applications
• Show how swaps and FRAs can be used to manage risk or to conceal it.
Course Content
• Introduction to financial instruments
• Bonds and interest rates
o Coupon bonds, Zero-Coupon bonds, Fixed-Payment loans
o The bond market and the determination of interest rate
o Duration, convexity and immunization strategies
• Derivates: concept and types
o Forwards and futures
o FRAs and Swaps
o Options, binomial and Black-Scholes models
o Greeks: analysis and decisions
Instructional Method
Lectures, interactive teaching, tutoring, practical exercises, discussions, case studies and tests.
Required Course Materials
Equipment required for following online classes.
All the required materials will be provided by the instructor during the course.
Recommended literature:
• Boyle, Patrick & McDougall, Jesse (2019). Trading and pricing financial
derivatives: a guide to futures, options, and swaps. Boston: De Gruyter
• CNMV (2007). What you should know about futures and options.
http://www.cnmv.es/DocPortal/Publicaciones/Guias/GUIA_OPCYFUT_ENGen.PDF
• Economics for financial Markets (2002). Brian Kettell.
https://doi.org/10.1016/B978-0-7506-5384-8.X5000-2
• Hull, John (2017). Options, futures, and other derivatives. Upper Saddle River:
Pearson, Prentice Hall.
Assessment
Practical exercises (30%)
Quiz (30%)
Final test (40%)