California Polytechnic State University
BUS 442: Introduction to Futures and Options
Prof. Cyrus Ramezani
TTH 2:10-04:00 PM, Room 03-302
M 12:30-04:00 PM and by appointment
Communicating with the Professor: The easiest means of reaching me and getting a reply to your questions is by Email. The next best way to reach me is to come to office hours. Please make use of my office hours.
First Assignment (due today): Send me an email. (subject line: BUS-442) providing the following information: name, major, class level, general interests, and anything else that may be of interest. I will create an email alias for the class and send articles and other important information via email. You will be responsible for materials sent to you by email (So please don't neglect email).
The course is concerned with the application of financial theory to the problems of valuing derivative securities and managing (hedging) their risks. The approach taken is ``bottom-up'' (instead of ``top-down'') in the sense that we will first study the valuation (selection) of simple instruments such as forward and futures contracts and then cover more complex securities such as options and swaps. Derivative assets ``derive'' their value from an ``underlying'' asset (example, the value of a call option on IBM depends on the price of IBM stock). We will use the replication (no arbitrage) methodology to value derivative securities. The replication methodology will also provide a framework for understanding and managing the risks associated with these securities. The main securities considered include forwards, futures, options, swaps and their associated investment strategies. This course will be very analytical requiring extensive use of Excel.
Prerequisites: A statistics course (at the level of Statistics 252) and intermediate finance courses (BUS-431 or Undergraduate Investment). Spreadsheet proficiency is a must. Please see me after class if you don't meet the requirements.
Course Reader is available on the course web age and can be printed as we cover the materials. A master copy is available from me if you wish to make a reader yourself.
Text Book: Fundamentals of Futures and Options Markets, Fifth Edition (On reserve at the library)
The Wall Street Guide to understanding Money and Markets, R. Wurman, A. Siegel, and K. Morris, 1992, Harper Pub.
Both books are available in paperback and hard cover from Amazon and other on-line Book Stores.
Other Reading: I will direct you to the web for supporting course materials. I may also email interesting articles to you. You will be responsible for these materials.
Calculators and Computer Software
You will make extensive use of Excel. Any calculator (financial or otherwise).
I will place other useful materials on reserve at the library. I will inform you of this by email.
Reading a national daily newspaper (Wall Street Journal, or Business Week). Subscription material will be circulated.
Portfolio Simulation: To place what you learn in this course in perspective it is highly recommended that you form a portfolio of your own and monitor its performance over time. To make this more realistic you need to keep record of your transactions, taxes, and your commission costs and compile periodic reports. A number of sites on the web provide such service. You may wish to form teams with your classmates and specialize in particular assets or industries.
Homework: There will be 2 homework sets (40% of grade). The due dates will be announced when the homework is handed out or placed on the course home-page (http://cyrus.cob.calpoly.edu). To make life easy on the grader, homework presentation should conform to a set of rules. The homework are substantial. Don't wait till the day before they are due! The homework would require less effort provided that you attend class, keep up with the readings and try your hands at the problems (using your calculator or computer software). You are encouraged to discuss problems with classmates but there will be a high penalty to all parties involved for copying homework (you would be surprised how easy it is to catch folks who duplicate. Surely, they reveal themselves on the exams!).
Late Homework Will Not Be Accepted!
Exams: Midterm and a final exam will be 50% of the grade. The format of the exams will be problems (50%) and definitions (50%).
All grading will be on the curve (i.e., your performance will be measured relative to others in the class).
No make-up exams will be given without prior consent and documentation to show why exam cannot be taken at the scheduled time. Exams are closed book.
Class Participation and Attendance: 10% of your grade will be determined by attendance and class participation. I will take roll and expect to know your names and have informal discussions with all of you during the term (I am told I have a good sense of humor. Remains to be seen!). Don't hesitate to point out anything about the course that may be annoying to you.
Overall Course Grade will be determined as follows:
Total-Score= .1 x Attendance + .2 x Midterm + .3 x Final + .2 x Homework-1 + .2 x Homework-2
Since attendance, midterm, homework, and final will have a 100 points each, the total score will be between 0-100 points. For example, suppose a student receives 90 for attendance, 75 on midterm, 90 on final., 80 and 85 on each homework 1 & 2. Then his/her total score will be:
Total-Score = .1 x 90 + .2 x 75 + .3 x 90 + .2 x 80 + .2 x 85 = 84
A distribution will be constructed from everyone's total score. The course grade will begin at F (total score below 50) and go up.
It is recommended that reading assignments be done prior to lectures. Calendar of topics and assignments will be posted on the course home-page (http://cyrus.cob.calpoly.edu) and will be mailed to you weekly.
Tentative Schedule of Lectures:
Week1: Introduction; Ch. 1 Futures and Forward Markets; Ch. 2
Week 2: Forward and Futures Hedging Strategies; Ch. 3 and Ch. 4
Week 3: Fixed Income Securities and Interest rate Futures; Ch. 5
Week 4: Swaps; Ch. 6
Week 5 and 6 : Stock Options; Ch. 7, Ch. 8
Week 7: Trading Strategies; Ch. 9
Week 8: Introduction to Binomial Trees; Ch. 10
Week 9 The Black-Scholes Model; Ch. 11
Week 10: Options on Stock Indices, Ch. 12 Last lecture: Summary and overview.