• derivatives (BU.756.750)- The johns hopkins university- carey business school FALL 2009/spring 2010


    Course Description

    The aim of the course is to offer a broad overview on forwards, futures, swaps and options. This course will cover both the actual working of derivatives and some of the analytical tools needed to effectively understand derivatives. In fact, the course balances theory and application. The overall emphasis is on how to price derivatives.

    Course Overview

    The course is divided into three main parts. The first part is very standard and is devoted to Forwards, Futures and Swaps and Options (1st part).

                    Part 1: Pricing of Forwards, Futures and Swaps and Options

    1. Pricing Forwards and Futures;
    2. Hedging using Forwards and Futures;
    3. Trading strategies with options Option pricing;
    4. Part 2: More advanced topic in derivative pricing

    5. Credit Derivatives
    6. Exotic Options Pricing
    7. Interest Rate Derivatives
    8. Part 3: Financial Econometrics

    9. How to compute volatility and covariance/correlation.
    10. The latest techniques in computing volatility (risk) and correlation will be discussed.

    Learning Outcome

    By the end of this course students will learn how to

    1. price futures and forwards;
    2. hedge risk exposure using derivatives;
    3. design swaps;
    4. trade options;
    5. price options

    Derivatives have become extremely important in financial markets. In fact, derivative securities are very versatile and can be used for hedging, speculation or arbitrage activity. Students attending this course will learn how to price and use derivatives. The emphasis is on both theory and practice.


    Corporate Finance (BU.756.701) course is prerequisite for this course.


    Discussion and exams will reward those who prepare in advance. The exams will draw heavily on the homework assignments given throughout the semester. Grading will be based on Reflection and Analysis Assignments (10 percent), quizzes (10 percent), two group assignments (30 percent), a midterm exam (25 percent) and a cumulative final exam (25 percent). Exams are take-home and open book. All homework should be typed and submitted to me by e-mail not later than specified due date (homework sent in late will not be accepted). For programming assignments, you should submit a working program file. For analytic and algebraic exercises, I prefer to receive them as a LaTeX format but also accept PDF files.

    Reflection and Analysis Assignments (due each week by Wednesday evening 11:59 PM):

    Every week, you will be required to submit two page review of an article related to derivatives markets found in the professional press (Wall Street Journal, Financial Times, Economist, standard business publications). Beyond a summary of the article, the student should critique based on readings and materials covered in class. Some weeks a specific article will be assigned for review. Be sure to provide a complete reference to the article (publication, author if available, title, date) and a brief summary (one paragraph) of the article. Include in your discussion the following 4 points. The assignment should be no more than 2 pages (with normal font and margins).

    1. What did you learn (most significant points)?
    2. What did it connect with that you knew previously and/or with what you have learned in this class?
    3. What questions does the article raise in your mind (e.g., what is unresolved)?
    4. How would this information impact you as an investor (either personally or professionally)?

    Group Assignments

    Since we wish to emphasize practical skills, students shall complete two sets of numerical problems. To reflect how most companies conduct business, students shall form groups to handle this assignment. Groups shall comprise four students -- no fewer, no more. Groups shall e-mail their composition to me by April 1 at the latest. Once groups have been formed, their composition is not allowed to change. I reserve the right to handle any and all group-related problems. Each group is to return an e-mail with its written answers and the supporting Excel spreadsheets by:

    Assignment #1 (group): by Wednesday, October 15 at 6 PM;

    Assignment #2 (group): by Wednesday, December 1 at 6 PM

    Required Texts

    We will use only parts of the following text.

    • John Hull (2008), Options, Futures and Other Derivatives, 7th Edition, Prentice Hall (hereafter, JH).
    • Robert McDonald (2006), Derivatives Markets, 2nd Edition, Addison Wesley. (hereafter, RM)

    Recommended Texts

    • Peter Christoffersen (2003), Elements of Financial Risk Management, Academic Press (hereafter, PC).
    • Justin London (2006), Modeling Derivatives Applications in Matlab, C++, and Excel, FT Press. (hereafter JL)

    Evaluation and Grading


    Learning Outcome


    Reflection Analysis






    Homework 1



    Homework 2



    Mid-term Exam



    Final Exam



    Grading Scale





















    Course Calendar

    Exams will not presume knowledge of the optional articles, except to the extent that they have been explicitly discussed in class. New articles may be added to the list during the course. The following is a tentative outline. Circumstances may arise which result in more or less material being covered.


    Lectures and Lectures Notes




    Introduction to Financial Derivatives


    Req. JH, Ch 1-3

    Rec. RM ch 1



    Interest Rates and Determination of Forward and Futures Prices


    Req.  JH Ch 4 and 5 

    Rec.  RM ch 2 and ch. 5



    Financial Forwards and Futures

    Req. JH ch 6

    Rec.  RM ch 5 and 7

    Homework 1

    due by October 15


    Commodity Forwards and Futures


    Req.  JH ch 6

    Rec.  RM ch 6





    Req.  JH ch 7

    Rec.  RM ch 8





    Req. JH Ch 8, 9 and 10

    Rec. RM 9



    Binomial Option Pricing and Black Scholes Formula


    Req. JH Ch 11, 12 and 13

    Rec. RM  Ch. 10 11,12 and 20




    Monte Carlo Valuation of Option


    Req.  JH ch 19

    Rec. RM Ch. 19


    Homework 2

    due by December 1


    Midterm Exam


    Guest Speaker TBA




    Credit Derivatives


    Req. JH Ch. 23




    Exotic options and their valuation


    Req. JH. Ch 24 and Sections 26.4 to 26.7

    Rec.  RM Ch 14




    Interest rate derivatives


    Req.  JH ch 28-31




    Financial Econometrics


    Req. PC Ch 2-4




    Course Review and Final Exam



    Academic Integrity and Ethical Conduct

    Carey Business School students assume an obligation to conduct themselves in a manner appropriate to The Johns Hopkins University's mission as an institution of higher education and with accepted standards of ethical and professional conduct. Students must demonstrate personal integrity and honesty at all times in completing classroom assignments and examinations, in carrying out their fieldwork or other applied learning activities, and in their interactions with others. Students are obligated to refrain from acts they know or, under the circumstances, have reason to know will impair their integrity or the integrity of the university. Violations of academic integrity and ethical conduct include but are not limited to cheating, plagiarism, unapproved multiple submissions, knowingly furnishing false or incomplete information to any agent of the university for inclusion in academic records, violation of the rights of human and animal subjects in research, and falsification, forgery, alteration, destruction, or misuse of official university documents or seal. Students are also expected to abide by the Student Code of Conduct (see pages 40-42).

    Disability Services

    If you are a student with a documented disability who requires an academic adjustment, auxiliary aid, or other accommodations, please contact Jennifer Smith in the Disability Services office at least four weeks prior to the beginning of the first class meeting:

    Statement of Diversity and Inclusion

    Johns Hopkins University is a community committed to sharing values of diversity and inclusion in order to achieve and sustain excellence. We believe excellence is best promoted by being a diverse group of students, faculty and staff who are committed to creating a climate of mutual respect that is supportive of one another’s success.

    Testing Center

    The Testing Center provides testing-related services including:

    • Administration of make-up exams
    • Accommodation for special testing needs due to a documented disability through Disability Services
    • Referrals for tutoring

    Contact the center by phone at 410/516-9750 or email: to inquire about testing needs.

    Attendance Policy

    Attendance and participation are part of your course grade. Full attendance and active participation are required for you to succeed in this course. One class, either excused or unexcused, may be missed without penalty. Beyond this one absence, your participation grade will be dropped ten points for each absence. Three absences, whether excused or not, result in a failing grade for the course. For an absence to be excused, you must have contacted the instructor prior to the class meeting, and you must provide a valid, legitimate, substantiated excuse at the next class session.

    Syllabus in pdf format