University of Melbourne - FNCE30007: Derivative Securities (Solutions)

This subject focuses on the application and valuation of derivative securities, such as forwards, futures, swaps and options. The emphasis will be on arbitrage relations, valuation, and hedging with derivatives. The topics covered include; Forwards and futures: the mechanics of trading, price determination, hedging strategies; Swaps: definition and valuation; Options: payoffs, arbitrage bounds, trading strategies, the binomial model, the Black-Scholes model and its relationship to the binomial, hedging, American options and dividends, options on futures, limitations of the binomial and Black-Scholes Models.

✔ On successful completion of this subject, students should be able to:

• Explain the role of derivatives exchanges and the characteristics of derivative securities;

• Explain the role of arbitrage as a basis for determining the prices of derivative securities;

• Explain the mechanics of trading futures contracts, forward contracts and options;

• Design and manipulate payoff diagrams for various derivative securities;

• Calculate option prices using the Black-Scholes and binomial models;

• Explain how derivative securities can be used in hedging;

• Reflect on the theoretical limitations of key derivatives pricing models and on practical difficulties that arise in their implementation.

SUBJECT CODE

SUBJECT NAME

ACCT10001

Accounting Reports and Analysis

ACCT10002

Introductory Financial Accounting

ACCT20001

Accounting for Management Decisions

ECOM20001

Econometrics 1

ECOM30001

Basic Econometrics

ECOM30002

Econometrics 2

ECON10003

Introductory Macroeconomics

ECON10004

Introductory Microeconomics

ECON10005

Quantitative Methods 1

ECON20002

Intermediate Microeconomics

ECON20003

Quantitative Methods 2

FNCE20005

Corporate Financial Decision Making

FNCE30001

Investments

FNCE30007

Derivative Securities

FNCE40001

Advanced Corporate Finance

MAST10010

Data Analysis

MAST20005

Statistics