Moodle

This module focuses on the pricing of financial derivatives and their use for hedging financial risks. We start with the basics of two most important derivatives, futures and options. This is followed by an extensive analysis of the most widely used option pricing models, the Black-Scholes model and the binomial model and various numerical techniques for pricing financial derivatives. Futures and options are then utilised in the context of hedging financial risks. By relaxing the rigid assumptions underlying the Black-Scholes formula, alternative option pricing models are presented. Students will be provided with computer exercises that will illustrate the practical implementation of the models introduced in the module.

Module Aims

The aim of this module is to provide students with an understanding of the pricing of financial derivatives and their use in hedging financial risks.

Learning Aims and Outcomes

The aim of this module is to provide students with an understanding of the pricing of financial derivatives and their use for hedging financial risks.

By the end of the module, students should be able to:

1. Understand the main types of derivatives and how they can be used to hedge risks.
2. Devise trading strategies and arbitrage strategies with derivative securities.
3. Understand the main concepts and methodologies underlying financial option pricing.
4. Understand option pricing models with stochastic volatility and jumps.

Skills for your professional life (Transferable Skills)

Critical Thinking: By studying the way derivatives work and the theoretical foundations of some widely employed pricing models students will be able to understand the assumptions used by these models and critically analyse them. This will allow students to appreciate the usefulness/weakness of these models, and understand why sometimes they work/fail in practice. This type of knowledge is particularly useful in areas such as investment banking and asset management.