Learning Objectives
5 objectives- Understand the fundamental concepts and types of financial derivatives.
- Analyze and apply key derivatives pricing models including Black-Scholes and binomial models.
- Evaluate hedging and risk management strategies using derivatives in various financial contexts.
- Examine derivatives trading strategies and the role of structured products in investment portfolios.
- Explore the regulatory environment and real-world applications of derivatives in financial engineering.
Content Outline
PreviewUnit 1213: Financial Derivatives and Their Applications
1. Introduction to Derivatives
- Definition and overview of financial derivatives
- Types of derivatives: options, futures, forwards, swaps
- Purpose and characteristics of derivatives
- Role and importance of derivatives in financial markets
- Examples of derivatives usage
2. Derivatives Pricing Models
- Overview of derivatives valuation
- The Black-Scholes Model
- Assumptions of the model
- Key variables and parameters
- Formula and calculation process
- Limitations of the model
- The Binomial Model
- Concept of binomial pricing trees
- Step-by-step pricing using the model
- Convergence to Black-Scholes
- Comparison of pricing models
3. Hedging Strategies with Derivatives
- Introduction to hedging and risk mitigation
- Using futures and forwards for hedging
- Hedging with options: protective puts and covered calls
- Swaps as hedging tools
- Case studies: Hedging commodity price risk, currency risk, and interest rate risk
4. Risk Management with Derivatives
- Types of market risks: interest rate, currency, commodity price risk
- Role of derivatives in risk management frameworks
- Measuring and managing exposure using derivatives
- Enterprise risk management and derivatives
- Practical examples and scenarios
5. Derivatives Trading Strategies
- Trading objectives: speculation, arbitrage, and hedging
- Speculative strategies with options and futures
- Arbitrage opportunities in derivatives markets
- Spread trading and other advanced strategies
- Risk and reward considerations
6. Structured Products and Derivatives
- Definition and characteristics of structured products
- How derivatives are embedded in structured products
- Types of structured products (e.g., equity-linked notes, principal-protected notes)
- Risks and benefits of structured products
- Role in portfolio diversification and yield enhancement
7. Regulatory Environment for Derivatives
- Overview of global regulatory bodies (e.g., SEC, CFTC, ESMA)
- Key regulations affecting derivatives trading (e.g., Dodd-Frank Act, EMIR)
- Compliance requirements and reporting
- Impact of regulation on market practices
- Emerging trends in derivatives regulation
8. Derivatives and Financial Engineering Applications
- Role of derivatives in portfolio management
- Applications in risk assessment and mitigation
- Use in investment banking and corporate finance
- Case studies: Structured finance, asset securitization
- Innovations and future directions in financial engineering
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