FM322      Half Unit
Derivatives

This information is for the 2025/26 session.

Course Convenor

Availability

Requisites

Mutually exclusive courses:

This course cannot be taken with ST330 at any time on the same degree programme.

Pre-requisites:

Students must have completed FM214 or FM210 before taking this course.

Additional requisites:

Mathematical Methods (MA100) is recommended but not required. Students who have not taken MA100 or equivalent are advised to do some pre-reading (see "Indicative reading" below). Students who have not taken Principles of Finance I (FM210 OR FM214), but have an excellent quantitative background, may be allowed to take this course at the discretion of the course leader.

This course is intended for third-year undergraduates and builds upon Principles of Finance I (FM210 OR FM214). It focuses on derivatives, with a particular emphasis on equity derivatives (standard call and put options, exotic options), futures and forward contracts, and interest rate derivatives (swaps, caps and floors, swaptions). It systematically addresses three basic questions: how do these products work, i.e. what are their payoffs? How can they be used, for hedging purposes or as part of trading strategies? And above all: how are they priced? The course emphasises a small number of powerful ideas: absence of arbitrage, replication, and risk-neutral pricing. These are typically introduced in the context of discrete-time models, but the course also covers some well-known continuous-time models, starting with a comprehensive treatment of the Black-Scholes model. The level of mathematics is appropriate for third-year students with a solid quantitative background.

30 hours of lectures in the Winter Term.

This course is taught in the interactive lecturing format. There is no distinction between lectures and classes/seminars; there are “sessions” only, and the pedagogical approach in each session is interactive.

Exercises will be discussed in class each week. Students will be expected to make positive contributions to class discussion.

There is no required textbook, but the following is an excellent reference: John C Hull, Options, Futures, and Other Derivatives.

The following pre-reading is recommended for students who have not taken Mathematical Methods (MA100) or equivalent:

Martin Anthony and Michele Harvey, Linear Algebra: Concepts and Methods

Chapter 5: Vector Spaces
Chapter 6: Linear Independence, Bases and Dimension

Ken Binmore and Joan Davies, Calculus, Concepts and Methods

Section 5.7: Taylor series for scalar valued functions of n variables

Exam (100%), duration: 120 Minutes, reading time: 15 minutes in the Spring exam period