Objectives
The objective of this course is to introduce students to important classes of derivative instruments: options and futures and introduce students to the most important concepts of the modern asset management industry. Students will learn how to price derivative contracts using no-arbitrage principles. Furthermore, students will be introduced to a number of option strategies and will learn how to use derivatives for hedging and speculation purposes. Students will be introduced to the different investment strategies employed by mutual funds and hedge funds and will learn how to evaluate the investment performance of these funds.
Contents
The first topic we discuss in the course is options. After examining the payoff structure of options, we introduce standard option strategies used by investors. Next, we derive no-arbitrage relations between the prices of put and call options and determine the factors that affect their prices. We introduce the binomial pricing model and we show that we can replicate the payoff of an option strategy using a position in the underlying asset and borrowing or lending. Furthermore, we develop an intuitive derivation of the famous Black-Scholes model, thereby discussing its most criticized limitations. Finally, we show how investors can profit from option mispricing. Futures and forwards are the next topic in the course. Although both instruments are conceptually similar, we show the main differences in their functionality. Subsequently, we examine how futures prices are determined. Using the notion of replication, we derive a relationship between spot and futures prices and show that, with small adjustments, the parity can be used to find the futures price of any asset. We focus on index futures and foreign exchange futures and discuss how these instruments can be used for hedging purposes. The modern asset management industry is the focus of the second part of the course. First, we cover several measures that are used in practice to evaluate investment performance, including measures that adjust portfolio returns for risk- and style tilts. Next, we examine the investment performance of mutual funds. We discuss their functions, investment styles and policies, and the costs of investing in these funds. Finally, we give an overview of the hedge fund industry, explain the different strategies hedge funds employ, and examine their performance measurement. In an effort to link theory to practice, we analyse some real life events, newspaper and academic articles.
Registration at
Please go to https://www.sis.uva.nl
Format
Weekly: a three-hour lecture and a two-hour tutorial. All the lectures are in English. Blackboard is used for all correspondence and material.
Time
Please go to http://rooster.uva.nl
Study materials
Bodie Z., A. Kane and A. Marcus. Investments. McGraw-Hill, 9th edition (c. €60).
Assessment
The final grade consists of the final exam (70%) and assignments (30%). For information on the grading in case of a resit go to the Blackboard site of the course.
Examination date
Please go to http://rooster.uva.nl and http://www.student.uva.nl/feb-academicyear.
Remarks
This course is a part of both the Dutch-language Bachelor's programme Bachelor Bachelor Economie en Bedrijfskunde and the English-language programme Bachelor's in Economics and Business.
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