Business 4413: Derivatives and Risk Management Winter 2012

Professor: Fuad Farooqi Office: 3R02A Phone: ext. 83825 Email: ffarooqi@ivey.ca Assistant: Carly Vanderheyden Office: 3R08 Phone: ext. 82483 Email: cvanderheyden@ivey.ca

COURSE OBJECTIVES This course is designed to help students: Learn how the most important derivative products are priced and used Learn trading strategies involving options Be able to talk knowledgeably about Black-Scholes and other pricing models Understand dynamic hedging MATERIALS 1. 2. 3. Case package (casebook) 4413 - compilation of cases and readings. Required. Fundamentals of Futures and Options Markets. John Hull, 7th Edition. Required. Students Solutions Manual to Fundamentals of Futures and Options Markets. John Hull, 7th Edition. This text is optional.

COURSE DESCRIPTION This course covers the analysis of derivative instruments such as forwards, futures, swaps and options. By the end of the course, students will have good knowledge of how these contracts work, how they are used and how they are priced. The course is designed from a managerial perspective with greater emphasis on the practical application of the underlying concepts rather than the mathematical derivation.

EVALUATION The grade for this course will be computed from the following components Component Class Contribution Project 1 Project 2 Comprehensive Final Total In 20 sessions Report (hand-in) Presentations in sessions 17-19 TBA Weight 20% 20% 20% 40% 100%

Class contribution is described in more detail below. The final will be short questions on the material covered during the course and will be graded by me and/or a course assistant under my close supervision; this process is necessitated by university grading deadlines. The final

will be closed book. However, you will be permitted a two-sided cheat sheet with notes and/or formulae. You will also be allowed the use of a financial or scientific calculator (nonprogrammable) but no phones, PDAs or notebooks allowed. Each component of your grade in this course will be assigned a percentage grade. Your final grade will be a weighted average of each of the components. Requirements for progression and graduation are provided to you separately by the HBA Program Office. CLASSROOM CONTRIBUTION AND EXPECTATIONS You are expected to be fully engaged in the entire learning process. This means devoting time and energy to preparation before class, including team meetings, listening to others during class and engaging in class discussions. Collective reasoning and discovery are critical to the successful application of the case method. Prior to any case discussion, engaging in discussions with (or examining notes from) others who may have already experienced a case is a violation of our norms. Be selective in taking notes during class. Detailed note-taking during class can often be distracting for others and counterproductive to your own learning I would recommend, at the end of each class, that you write a few notes on the key learning points. Unless otherwise stated, our classes will be laptop free. Cell-phones and other electronic devices are to be shut off during class. The classroom discussion represents a unique opportunity for you to develop and enhance your confidence and skill in articulating a personal position, reacting "on the spot" to new ideas and receiving and providing critical feedback from a group of assertive and demanding colleagues. Contribution can take many forms including an interesting assessment of the problem, identification of imaginative yet realistic solutions to the problem, a carefully thought out analysis of alternatives or an effective strategy for implementation of the alternative chosen. Contribution can also be achieved through a level of questioning that causes the class to rethink its analysis and position. Contribution helps to move the learning forward for the contributor and other students. It is not necessarily about getting the right answer as deeper learning can result from exploring the holes in certain ideas or answers. Emphasis will be placed on the quality of contribution. I keep class-by-class records of each student's contribution. I also rely on peer evaluation of contribution. Each class students (selected at random) will be asked to record unique contributions and absences. Other students (selected at random) will be asked to give me, after class, a list of those they thought made the most significant contributions to the class. Your contribution grade (maximum of 20) will be broken into 3 components 1. Attendance you will receive 0.5 points for each class you attend (up to a maximum of 10 points), are prepared and avoid negative contributions. Negative contributions include lateness, rude remarks, disruptive behaviour, or aggressively attempting to push discussion off course. 2. Participation you will receive up to 5 points for meaningful contributions to case class discussions. Each class we will track unique contributions. For each class you make a meaningful contribution, you will receive 0.5 points 3. Top Contributions you will receive an additional 1 point for each case class where you contribute strongly to the learning of your peers (as assessed by me with input from the peer evaluation process).

You will be assigned end-of-chapter questions for each lecture-based session. If there is time at the end of the lecture, volunteers would be invited to the front of the class to explain their solution and this may constitute top contribution. At this stage, these component weights are indicative and may be revised given the final class size i.e. after the drop date. PROJECT 1 The project is designed to provide an opportunity to run a hedging exercise using the tools and knowledge acquired in class. While project specifics will be provided during the course, broadly speaking, it will be done in self-selected teams of 4-5 students each. The exercise will be split into two parts. In the first part, i.e. the update, the groups will be required to structure a hedge for an ETF/index. In the second part of the project, they will have to follow-up on the performance of the hedge and provide a write-up on the results. In terms of deliverables, the Project Report should be in the form of a two-page memo (font: Times New Roman 12) with no more than 5 exhibits (other than the 2-pages) explaining the structure and performance of the hedge. This will represent 20% of the overall grade. PROJECT 2 During the course of this elective, we will be focusing primarily on the pricing and usage of derivatives instruments. However, there is as much to be learnt from the failures (disasters) in this field and there have been plenty of those in the last few years. This will be covered through the second project. Working in the same teams as for Project 1, the groups will select a derivatives disaster and prepare a 2-4 page paper on the event. The groups will then have to make a 20 min presentation to the class (sessions 17-19) explaining the situation, the derivatives position taken, what went wrong and lessons learnt. The presentations and the report will be graded and will represent 20% of the overall grade. ATTENDANCE Attendance in all sessions of this course is mandatory. If you miss a class, you will not receive any contribution credit for that class; there is no way to make up for a missed day (notifications requirements must be met see below). If absenteeism has reached 25 percent (i.e., more than 5 classes), you are not eligible to write the final exam/report and you will fail the course. This UWO policy is outlined at www.uwo.ca/univsec/handbook/exam/attend.pdf . Missed classes with the exception of religious holidays with advance notice or extended absences approved by the program office, will be included in the overall calculation for contribution. Notice of Absence: We recognize that circumstances may arise that make it impossible for you to attend. If you are unable to attend class for any reason, we expect you to comply with HBA program requirements
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for notifications and send an email to the HBA AWAY email address, in advance with the reason for your absence. If you fail to do so, you will receive an attendance grade of -0.5 for that class. PROHIBITED INFORMATION Unless explicit instructions are received from your instructor to the contrary, your preparation must be limited to the information provided by your instructor(s), plus your own experience and that of your class peers. Class contributions should be based exclusively on your preparation and discussions with members of your learning team or section classmates, and not augmented with information obtained anywhere else. Information related to a case that has been obtained from sources other than your instructor in paper, electronic or verbal form is not permitted to be used for class contribution purposes. Such prohibited information includes, but is not limited to, the following: Hand-outs, including follow-on ("B") cases Exam or report feedback (related to a particular case) for other students or provided in other sections or years Notes, spreadsheets, etc. specific to cases (obtained before the case has been taught) prepared by students in other sections or years or other universities. Company information that is not provided in the case or by the instructor (and that is not derived from your own experience) Teaching notes If it is determined that such prohibited information is used in class discussions, such an incident will be deemed to be a violation of Ivey's Student Code of Professional Conduct. PLAGIARISM Students must write their exams in their own words. Whenever students take an idea, or a passage from another author, they must acknowledge their debt both by using quotation marks where appropriate and by proper referencing such as footnotes or citations. Plagiarism is a major academic offence (see Scholastic Offense Policy in the Western Academic Calendar). All required papers (at Ivey this includes case exams and reports) may be subject to submission for textual similarity review to the commercial plagiarism detection software under license to the University for the detection of plagiarism. All papers submitted will be included as source documents in the reference database for the purpose of detecting plagiarism of papers subsequently submitted to the system. Use of the service is subject to the licensing agreement, currently between The University of Western Ontario and Turnitin.com (hyperlink www.turnitin.com). APPEAL OF GRADES Any appeal should be made within seven days (but not sooner than two days) of receiving the grade. Return the paper to me with a note summarizing your concerns. I will deliver a written reply after reviewing your comments. If you are not satisfied at this stage, we can then make an appointment to discuss your paper and its grade. If a grade is appealed, the grade may be changed upward or downward. You can also request feedback on your class contribution grade at any time.

APPOINTMENTS Please feel free to contact me at any time. I have an open door policy (which means that if I am in my office when you drop by, I will try to see you immediately). However, given my other duties, I may not always be available. If you wish to see me at a specific time, please e-mail me.

PROPOSED SCHEDULE Please check eZone regularly for changes to the schedule and other course news. FORWARDS & FUTURES 1. Air Canada and Introduction Chapters 1-3 2. Interest Rates Chapters 3-4 3. Determination of Forward and Futures Prices Chapter 5 4. Interest Rate Futures Chapter 6 5. Voyages Soleil SWAPS 6. Interest Rate Swaps Chapter 7 7. Currency Swaps Chapter 7 8. Goodrich-Rabobank Interest Rate Swap OPTIONS 9. Introduction Chapter 9-10 10. Trading Strategies Chapter 11 11. Binomial Tree Chapter 12 12. Black-Scholes Model Chapter 13 13. Options on Stocks/Indices Chapter 15 14. Futures Options Chapter 16 15. The Greeks and Volatility Smiles Chapters 17 & 19 (19.1 & 19.2) 16. Mogen, Inc. PRESENTATIONS & REVIEW 17. 19. Presentations 20. Review Session