Derivatives FINC416 - Coughenour

Financial Engineering & Risk Management

FINC856, Spring 2012

Jay Coughenour, coughenj@udel.edu, 302-831-1484

Course Information

Syllabus

Class Schedule and Notes

(schedule is subject to change)

Feb7     Introduction through a little history (Ch 1-2)

Feb9     Overview of contract types (Ch 1-2)

Feb14   Basic Risk Management with Derivatives (Ch 3-4)

Feb16   Basic Risk Management with Derivatives (Ch 3-4)

Feb21   Arbitrage Pricing of Derivatives and basic Financial Futures (Ch 5)

Feb23   Financial and Currency futures (Ch 5-6)

Feb28   Oil futures (Ch 6)

Mar1     Natural Gas and Weather futures (Ch 6)

Mar 6    Interest Rate Transformations (Ch 7)

Mar8     FRA and Eurodollars (Ch 7)

Mar13   Swaps - the basic economic principles & commodity swaps (Ch 8)

Mar15   Swaps - currency, equity, and interest rate swaps (Ch 8)

Mar20   Swaps - variations on a theme (Ch 8) Swap Excel Spreadsheet Old Exam with Answers!

Mar22   Review for Exam 1

Spring Break

Apr3       Exam 1 (35%) Solutions

Apr5        Basic option relationships (Ch 9)

Apr10      Option Pricing Spreadsheet

Apr10      Binomial option pricing 1 (Ch 10)

Apr12      Binomial option pricing 2 (Ch 10)

Apr17     Black Scholes option pricing (Ch 11)   Black Scholes (1973) Smith (1979)

Apr19     Delta, Gamma, and Portfolio Insurance (Ch 11)

Apr24    Structured Notes without options (Ch 12)

Apr26    Structured Notes with options (Ch 12)

May1     Structured Notes - exotics (Ch 12)

May3     Structured Notes - M&A offers (Ch 13 - pages 412-416)

May8     Credit Derivatives 1 (Ch 12)

May10   Credit Derivatives 2 (Ch 12)

May15   Review Session

May17   8:00 - 10:00 Purnell 118 Exam 2 (35%) Solutions

Assignments

The assignments are designed to reinforce topics covered in class as well as cover more general topics about

derivative markets and risk management (history, current events, etc.) not covered in class.

Each assignment is worth 2.5%, for a total of 30%. Although the assignments are equally-weighted, please note

that there will be significant variation in the degree of difficulty across the assignments.

Assignments will typically go online Thursday morning.

All assignments due by 23:45 on date shown.

To access the assignments you have to enter your UD email address (ending with @udel.edu),

and you have to enter your UD student ID as your password! Please do not enter gmail addresses

or addresses from any other domain. Thanks!

Practice (not graded) - Due Wednesday, Feb 8

Assignment 1 - Due Sunday, Feb 12

Assignment 2 - Due Sunday, Feb 19

Assignment 3 - Due Sunday, Feb 26

Assignment 4 - Due Sunday, Mar 4

Assignment 5 - Due Sunday, Mar 11

Assignment 6 - Due Wednesday, Mar 21.

Spring Break

Assignment 7 - Due Monday, Apr 9, 11:45 PM

Assignment 8 - Due Sunday, Apr 15

Assignment 9 - Due Sunday, Apr 22

Assignment 10 - Due Sunday, Apr 29

Assignment 11 - No Assignment, Everyone Gets 100 points

Assignment 12 - Due Sunday, May 13

Current Events (typically related to class topics)

WSJ Dec 5, 2011: Overweight in Metal, This Band Tries to Play Tunes in Forex

WSJ Feb 6, 2012: Stats on Corn Called Flaky

Reuters, Feb 9, 2012: Credit Suisse 4th Quarter Loss

WSJ Feb 13, 2012: Crisis in Japan Transforms Global LNG Market

WSJ Feb 24, 2012: Behind Corn's Squeeze Play: Farmers

Business Week Feb 24, 2012: Goldman Sachs Recommends Buying WTI Oil on Seaway Reversal

WSJ, Feb 28, 2012: Pipeline Gets Jump with Gulf Route

WSJ, Mar 5, 2012: Natural Gas Powered Pickups Coming

FT, Mar 6, 2012: Bankers Embark on LIBOR rate-setting rethink

WSJ, Mar 8, 2012: Bountiful Harvest Leaves Coffee Cold

WSJ, Mar 8, 2012: Natural Gas Touches Decade Low

NYT, Mar 14, 2012: Why I am Leaving Goldman Sachs Goldman Response Another Rebuttal

WSJ, Apr 5, 2012: Options Exchange Examining its Traders

WSJ, Apr 11, 2012: Making waves against 'whale'

WSJ, Apr 11, 2012: Natural Gas Falls Below $2

WSJ, May 1, 2012: Energy Transform Partners buys Sunoco for $5.3 billion

BP / Anadarko / Deepwater Horizon oil rig explodes on April 20, 2010.

April 22, the Deepwater Horizon oil rig sinks to bottom of Gulf of Mexico.

April 23, the US Coast Guard reports no evidence of leaking oil, even at 5000 ft below

April 26, the US Coast Guard estimates 1,000 barrels/day are leaking into water at well head.

April 30, oil hits the shores of Louisiana.

May 7, BPs bid to place giant box over well to contain leak fails.

May 26-27, BPs bid to plug leak with a 'top kill' fails

June 2, US Justice Department announces criminal inquiry into BP and related parties.

August 4, relief well combined with 'static kill' appears to have stopped the leak.

September 17, BP pumps cement to plug old well head

September 19, leak declared officially over by BP and US authorities.

Academic Papers

Nance, D., Smith, C. W., and C. Smithson, 1993, On the determinants of corporate hedging, Journal of Finance, 48, 267-284.

Geczy, C., Minton, B., and C. Schrand, 1997, Why firms use currency derivatives, Journal of Finance, 52, 1323-1354.

Bettis, J.C., Bizjak, J., and M. Lemmon, 2001, Managerial ownership, incentive contracting, and the use of zero-cost collars and equity swaps by corporate insiders, Journal of Financial and Quantitative Analysis 36, 345-370.

Moore, L., and S. Juh, 2006, Derivative pricing 60 years before Black-Scholes: Evidence from the Johannesburg Stock Exchange, Journal of Finance 61, 3069-3098.

Brown, G., 2001, Managing foreign exchange risk with derivatives, Journal of Financial Economics, 60, 401-448.

Allayannis, G., and J. Weston, 2001, The use of foreign currency derivatives and firm market value, Review of Financial Studies, 14, 243-276.

Graham J., and D. Rogers, 2002, Do firms hedge in response to tax incentives? Journal of Finance, 57, 815-839.

Guay, W., and S. P. Kothari, 2003, How much do firms hedge with derivatives? Journal of Financial Economics, 70, 423-461.

Minton, B., Stulz, R., and R. Williamson, 2008, How much do banks use credit derivatives to hedge loans? Working Paper, Ohio State University.