Course Syllabus

The Chinese University of Hong Kong

MSc in Finance
FINA6132 Derivatives Markets
Sessions FD, 2023-2024

INSTRUTOR:
Professor Yang Su
Office: Room 1215, 12/F, Cheng Yu Tung Building
Phone Number: 3943-7638
E-mail address: [email protected]

TUTOR:
Mr. Kelvin Lam
Tutorial Time: Please see “google sheets on blackboard”
Office: Room 1235, 12/F, Cheng Yu Tung Building
Phone Number: 9536-9498
Email address: [email protected]

CLASS HOURS:

FINA6132FD Derivatives Markets

Time: 10:00 am – 1:00 pm, 2:30 pm – 5:30 pm (Saturday)

Date:
Apr 27
May 4, 11, 18, 25
Jun 1
June 8 (Final)
Venue: TBD

COURSE WEBSITE:
The site is available through Blackboard at https://elearn.cuhk.edu.hk/. The site will
contain useful material including: PowerPoint slides from class lectures, syllabus,
assignments and other things.
Check your CUHK email and check the course webpage on blackboard regularly.
COURSE DESCRIPTION
There has been an enormous growth in the markets for futures and options on real and
financial assets. These markets are used by individuals and institutions to meet a variety of
objectives, such as hedging, speculation, and even investment. The derivatives markets
were built on a considerable development of methodologies and tools in the academic and
financial communities for analyzing futures and options. While the theory might at first
glance appear advanced and difficult, it is in fact quite accessible. The purpose of the course
is to provide students with the necessary economic concepts and quantitative skills for
understanding and valuing derivative securities.

As demonstrated by the recent financial crisis, the risk embedded in many complex
derivative securities can be multi-dimensional and new sources of risk may emerge in a
rapidly changing market environment. Thus, this course stresses the importance of
understanding the economic underpinnings of various derivative pricing frameworks rather
than the mechanical pricing formulas. Nevertheless, it is necessary to explore the topics at
a technical level. The course requires use of calculus, probability, and statistics. Expect lots
of number crunching and numerical examples.

TEXTBOOK
 McDonald, Robert, Derivatives Markets. Pearson. 3rd edition.

REFRENCE BOOKS
Duffie, Darrell and Kenneth Singleton, Credit Risk. Princeton University Press.
(optional)
 Geman, Helyette, Commodities and Commodity Derivatives. Wiley. (optional)
Hull, C. John, Options, Futures and Other Derivatives, Pearson, (optional)
COURSE REQUIREMENTS

Team Project:
An important requirement of the course is the Derivatives team project. Each team will
present a practical project related to the selected topic. As the term progresses your team
will be required to use the skills you learn in the classroom to successfully complete this
project. The team should become the class experts on this topic.

a) Team formation
Each student will join a group. Your individual contribution to the group efforts and
accomplishments will be reflected in a peer assessment/group evaluation that will be
conducted for each group activity. No group swapping is allowed. You are also expected
to manage your group activities effectively and efficiently.

Each team consists of 6 students. Each team will be responsible for one assigned topic.
You should avoid the examples mentioned in the class. Please form a group by yourself
and inform your tutor about your team and topics you are interested in. You must choose
and rank 3 topics out of the following topics:

1 Credit derivatives
2 Interest rate derivatives
3 Equity derivatives
4 Commodity derivatives
5 Exotic options
6 Employee stock options
7 Real options
8 Volatility
9 Derivatives markets in Hong Kong
10 Derivatives markets in Mainland China
11 Impact of COVID-19 on derivatives markets
12 ESG / sustainable finance in derivatives markets

Please include the class name in the subject (FINA6132FD), list both full name (also
nickname) and ID in the message, and rank your 3 topics. We will assign the topic
according to first-come, first-served principle. If you form your team and submit earlier,
you are more likely to get your high-ranking topic. If you submit too late and all your three
topics have been taken away, we will assign a topic to you. You must list all your
teammates when you submit your topics. You will be randomly assigned to a team if
you missed the deadline.

Team composition will be posted on web. Students are required to work together with their
group members to facilitate discussion within group. Students need to prepare a real
product/market project rather than a theoretical model or a general description of the topic.
Students are encouraged to use the tools learnt in the class to analyze the project.

b) Proposal
Each group will be asked to submit a proposal. The proposal should consist of two parts:
the background of the specific derivatives product/market and your project plan. The report
should not exceed 4, double-spaced, typed (12 pitch Times New Roman font) pages of text
(1-inch margin). After I receive the proposal, I will schedule a meeting with each group to
discuss your project. Please submit the softcopy to the tutor.

c) Final deliverable

This part has two central components. The first is a presentation in class. The second is a
written report, should detail the specific aspects of your analysis. The presentation should
cover the highlights of the defined project. Each of these components is explained in more
detail as follows.

 Team project presentation and Q&A

Presentations will run at end of this semester – (see schedule for detail date). During these
presentations, team members will present the highlights of their project. Teams should take
around 15 minutes to present their work and then answer question from audiences (around
5 minutes). Please control your time, teams that exceed 15 minutes of presentation will be
STOPPED at the mark. Therefore, practicing your presentation is strongly advised.

Presentations must be professional and you will be graded on how well you articulate and
present your ideas. I expect around all team members to be involved in the presentation.

 Written report

The written report should contain a title page, a summary, report contents, a conclusion,
and any necessary appendices

Use this change to clarify any issue left from oral presentation and make any necessary
improvement from what you learn at oral presentation. The report should not exceed 15,
double-spaced, typed (12 pitch Times New Roman font) pages of text (1-inch margin).
This page limit includes title page, executive summary, table of contents, and appendix
materials.

a. Please submit the softcopy to tutor.

b. Please also send the declaration of originality statement to tutor. You should indicate
that you have done this work by yourselves and did not copy any work done by others.
Declaration form is available on Blackboard.

c. To uphold the University's policy on plagiarism, please also submit your written
assignment through VeriGuide (https://veriguide1.cse.cuhk.edu.hk/cuhk/) and then email
a signed VeriGuide receipt (i.e., Acknowledgement Statement) to tutor.
Peer evaluation: In order to recognize individual contributions in team activities, and to
prevent free-riding problems, team evaluation results may be used to adjust team grades in
calculating the final individual grades – when it becomes necessary. You will be asked to
complete the peer evaluation form after project presentation.

Assignment:
There will be two assignments which help you practice and prepare for the exams.

In-Class Exercise:
At the end of each class, we will have an in-class exercise to help you review the class and
help us know how you have learnt in the class.

Exams
There will be a final exam covering material from the class sessions. Anything that is not
mentioned in class will not be included in the test. You may regard textbook as a dictionary.
It can help you review the content more systematically. But you are not required to
remember everything from the textbook.

GRADE
The grade components and the associated weights are as follow:
1. In-Class Exercise and Participation 10%
2. Assignments 10%
3. Team Projects 35%
4. Tutorial 5%
5. Final Exam 40%

Grade Descriptors

A/A- Outstanding performance on all learning outcomes

B+/B/B- Substantial performance on all learning outcomes, OR high

performance on some learning outcomes which compensates for less
satisfactory performance on others, resulting in overall substantial
performance.

C+/C/C- Satisfactory performance on the majority of learning outcomes,

possibly with a few weaknesses.

D+/D Barely satisfactory performance on a number of learning outcomes.

F Unsatisfactory performance on a number of learning outcomes, OR

failure to meet specified assessment requirements.
COURSE OUTLINE
The following is an outline of the course, which is subject to changes. The corresponding
readings are given below.

Week 1 (Apr 27)

• Introduction to Derivatives (Chapter 1&2)
• Basic Strategies (Chapter 3&4)

Week 2 (May 4)
• Forwards and Futures (Chapter 5)
• Commodity Futures (Chapter 6)
• Assignment 1 posted
• Group formation deadline (inform Tutor)

Week 3 (May 11)

• Commodity Index Investment (Chapter 6)
• Swaps (Chapter 8)
• Assignment 1 due

Week 4 (May 18)

• Put-call parity (Chapter 9)
• Binomial option pricing (Chapter 10&11)
• Group Project proposal due
• Assignment 2 posted

Week 5 (May 25)

• Black-Scholes (Chapter 12&13)
• Corporate Applications and Real Options (Chapter 15-17)
• Credit Risk Modeling (McDonald, Chapter 26, Duffie and Singleton, Chapters 3-7)
• Assignment 2 due

Week 6 (Jun 1)
• Credit Risk Modeling (McDonald, Chapter 26, Duffie and Singleton, Chapters 3-7)
• Credit Derivatives (McDonald, Chapter 26)
• Group Project presentation (afternoon)

Week 7 (June 8)
• Final exam (morning)
• Group project report due
ATTENDANCE
Attendance Policy for the MSc in Finance by the Management Committee of the MSc
in Finance:
“Class attendance will be taken each session. Students are expected to be punctual. All
students are requested to sign on the attendance sheets. The attendance sheets will be kept
by tutor and any signatures made 30 minutes after the class starts will be crossed out with
a red line for identification. Students who are late for more than 15 minutes will be
considered absent for a half of the session. All applications for leave of absences on the
grounds of personal, medical or work-related reasons (for part-time students only) should
be submitted, together with supporting documents, to the respective tutors or teachers for
processing.”

ACADEMIC INTEGRITY
Attention is drawn to university policy and regulations on honesty in academic work, and
to the disciplinary guidelines and procedures applicable to breaches of such policy and
regulations.