FIN229. Futures & Options Markets & Trading.pdf - ONWE B E...

This preview shows page 1 out of 372 pages.

Unformatted text preview: ONWE B E S UIL UC D F CES UT U ATS STORES A T RY IM E FIN229 Futures and options markets and trading Master of Applied Finance Futures and Options Markets and Trading (FIN229) Introduction DISCLAIMER These materials are issued by Kaplan Higher Education on the understanding that: 1. Kaplan Higher Education and individual contributors are not responsible for the results of any action taken on the basis of 2. Kaplan Higher Education and individual contributors expressly disclaim all and any liability to any person in respect of information in these materials, nor for any errors or omissions; and anything and of the consequences of anything done or omitted to be done by such a person in reliance, whether whole or partial, upon the whole or any part of the contents of these materials; and 3. Kaplan Higher Education and individual contributors do not purport to provide legal or other expert advice in these materials and if legal or other expert advice is required, the services of a competent professional person should be sought. The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of Kaplan. COPYRIGHT © Kaplan Higher Education, 2011. All rights strictly reserved. No part of these materials covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the written permission of Kaplan Higher Education. Kaplan Higher Education makes every effort to contact copyright owners and request permission for all copyright material reproduced. However, despite our best efforts, there may be instances where we have been unable to trace or contact copyright holders. If notified, Kaplan Higher Education will ensure full acknowledgement of the use of copyright material. ACKNOWLEDGEMENTS All ASX material is © ASX Limited. All rights reserved. All ASX material is reproduced by the publisher with the permission of ASX Limited. No part of this material may be photocopied, reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical or otherwise, without the prior written permission of ASX Limited. Kaplan Higher Education acknowledges the support of Morningstar, EBSCO Australia and ProQuest in the development of its course material. Contents Introduction Topic 1 Introduction to futures and options markets Topic 2 Trading and clearing processes Topic 3 Equity futures Topic 4 Interest rate futures — short-term Topic 5 Interest rate futures — long-term Topic 6 Commodity futures Topic 7 Options trading and strategies Topic 8 Options pricing Topic 9 Equity-based options Topic 10 Interest rate options Welcome Congratulations on choosing to complete your postgraduate studies with Kaplan Professional. As an accredited higher education institution Kaplan Professional specialises in postgraduate courses in applied finance and financial planning. We are passionate about helping you reach your goals through quality education. Our courses are developed, presented and assessed by working professionals who are experts in their fields. This gives you an edge over your peers because you can apply the real-life concepts and techniques you learn directly to your day to day work. You can also form important relationships with this influential community as well as with your fellow students, which will help build your professional networks. Kaplan Professional is part of Kaplan, Inc., a leading global education provider, which serves more than one million students in 30 countries each year. By studying with us you are now part of this global connection, which means that your qualification will be recognised throughout the world. Kaplan is also at the forefront of online and mobile learning, having pioneered major advancements in these areas. In the United States alone, Kaplan University has over 50,000 students studying online. Kaplan Professional continues to leverage this expertise to develop new and sophisticated learning resources and tailored, adaptive education programs. Above all, we are dedicated to ensuring you have the best possible experience as a student. Your Student Adviser is available to you throughout your studies, whether you need advice on fitting study into your schedule or guidance on which subjects will help you meet your career goals. I sincerely wish you all the best with your studies. Neil Shilbury Chief Executive Officer Kaplan Australia Introduction Subject aims This elective subject is designed for students who wish to specialise in financial markets. The subject provides students with knowledge of futures and options products and markets including market structure, participants and the products used for managing risk and/or trading for profit. Students will gain the skills to analyse, price and trade futures and options products. Subject learning outcomes After successfully completing this subject students should be able to: • Outline the structure and operation of the global futures and options markets. • Describe the legal and regulatory framework of the futures and options markets. • Implement and evaluate hedging, arbitrage and speculative trading strategies using futures contracts. • Construct specific options trading strategies. • Evaluate simple option pricing models and their uses in options trading. • Monitor and evaluate market risk arising from open futures and options positions. • Undertake market analysis. • Explain the system of clearing and processing trades through the ASX. © Kaplan Higher Education 2 Futures and Options Markets and Trading (FIN229) Contributors The subject notes and associated assessment items have been developed by Kaplan in consultation with the industry practitioners and academics listed below. Name Employer Mr Darren O’Connell (Chair) Position Consultant Mr Richard Bobb Richard A Bobb Chartered Accountants Consultant Ms Kathy Chiha RMIT University School manager — Graduate School of Business Mr Paul Haddow Tullett Prebon (Australia) Pty Ltd Broker, interest rate products Mr Dougal Hunter Australian Securities Exchange Limited Market development executive, agricultural derivatives Mr Lee Rushton Sovereign Capital Management Pty Ltd Managing director Ms Grace Yen Australian Securities Exchange Limited Senior risk analyst, clearing risk policy Ms Jennifer Hornsey Kaplan Professional Senior editor Prerequisites The prerequisites for this elective subject are the following or their equivalents: • Financial Markets and Economic Principles (FIN111) • Law, Regulation and Ethics (FIN112) • Techniques in Financial Analysis (FIN113) • Risk Management for Finance Sector Enterprises (FIN114) • Interest Rate Markets (FIN240). Assumed knowledge This subject assumes students have an understanding of the underlying products and markets of equity, fixed interest and commodities. FIN229.SM1.2 Introduction Study commitment It is anticipated that the total study commitment time for this subject will be approximately 120 hours. This includes: • reading subject notes and any required readings (e.g. articles and textbook chapters) • completing specified learning activities as set out in the subject notes and/or Subject Room (e.g. ‘Discuss this’ and/or ‘Apply your knowledge’ activities) • listening to any pre-recorded lectures/presentations • undertaking relevant research activities • preparing for and undertaking assessment activities. Note: Students should review due dates for assessments and plan their study to ensure relevant topics are covered prior to the assessment due date. Subject snapshot The table below provides a quick overview of this subject. It lists each topic, identifies when assessment items occur and recommends the study effort for each topic or assessment task. This snapshot is a useful tool for developing a study plan. Week Topic Topic name 1 Topic 1 Introduction to futures and options markets 6 hours 2 Topic 2 Trading and clearing processes 6 hours 3 Topic 3 Equity futures 6 hours 4 Topic 4 Interest rate futures — short-term 8 hours 5 Topic 5 Interest rate futures — long-term 8 hours 6 Topic 6 Commodity futures 6 hours 6 Recommended student effort Assessment 1 — Assignment 20 hours 7 Topic 7 Options trading and strategies 8 hours 8 Topic 8 Options pricing 8 hours 9 Topic 9 Equity-based options 6 hours 10 Topic 10 Interest rate options 8 hours 11 Revision 12 Assessment 2 — Exam 30 hours Total hours 120 hours © Kaplan Higher Education 3 4 Futures and Options Markets and Trading (FIN229) Subject Room The Subject Room is the primary communication point for this subject. Students can access the Subject Room with their personal ID and password via the Kaplan Professional website at < ;. The Subject Room provides access to a range of resources and services including: • announcements and FAQs about the subject • information about joining a study group for the subject • information about the subject (e.g. outcomes, topics, contributors, assessment) • access to the subject notes (eBook) and a guide on how to use the eBook • lecture recordings on individual topics • further resources and other learning activities • access to the Discussion Forum and the Kaplan Library • assignments and other information related to assessment • a Study Guide to provide strategies for studying and preparing for assessments • information on who to contact with queries. Resource requirements Details of general resource requirements are available on the Kaplan Professional website at < ; under ‘Study information’. As a minimum, students will need access to a computer with at least Microsoft® Word, Excel and PowerPoint (or their equivalent) installed. Access to the internet and a current active email account is also required. Policies and forms All students should be familiar with the relevant policies and how they apply to their study. Policies and forms can be accessed on the Kaplan Professional website at < ;. Student support For administration queries or to discuss confidential issues that may impact on study, students should contact their nominated Student Adviser. Contact details can be found in the Subject Room under ‘Contact Kaplan’. FIN229.SM1.2 Introduction Assessment Detailed information about due dates, assessment content, assignment submission, and exam locations and times is posted in the Subject Room. Weightings and due dates for each assessment item are outlined in the table below. Assessment item Weighting Week due 1. Assignment 40% Week 6 2. Exam 60% Week 12 Submission of assignments Assignments must be received by the due date specified in the Subject Room. Details of how to submit assignments can be found in the Subject Room under ‘Your assignment’. Kaplan will only accept late submission of assignments under exceptional circumstances. Refer to the Assessment Policy for more information. Pass requirements To pass this subject, students must achieve a combined result from all assessment items of at least 50%. Students who receive less than 50% in any assessment item may continue in the subject and still pass the subject, provided they meet the overall 50% criteria. Students should read the Assessment Policy for further details. Sample assessments Practice questions and/or sample assessments may be included in the Subject Room. These provide students with an opportunity to review the structure, style and types of questions they can expect in an exam or assignment. While these sample assessments reflect the general style and level of assessments, they do not include material which is presented in the actual assessments for this subject. © Kaplan Higher Education 5 6 Futures and Options Markets and Trading (FIN229) Subject notes and learning features The subject notes provide a structured learning pathway that integrates theory and real-world practice. They contain content specific to the subject area and are supported by a range of learning features to ensure there is a breadth and depth to the content as well as an opportunity for students to actively engage with the subject materials. There is a range of learning features specific to this subject. These are listed below. Required readings There is no prescribed textbook for this subject. Required readings for this subject are included in the subject notes at the end of each topic or are accessible through designated areas such as the Subject Room, library or direct web links. Further resources Further resources provide students with an opportunity to gain a deeper understanding of the subject. They may be textbooks, journal or newspaper articles, websites or other relevant material. These items are generally available via links in the eBook (electronic) version of the subject notes or other designated areas in the Subject Room. These resources are not assessable. However students are encouraged to access them to assist in preparation of an assessment item, develop understanding of a topic area, or out of personal interest. The following reading provides useful insight into futures and options relevant throughout this subject. Hull, JC 2008, Options, futures and other derivatives, 7th edn, Prentice Hall, New Jersey. Application and review activities The ‘Apply your knowledge’ and ‘Review your progress’ learning features provide students with the opportunity to actively engage with the subject materials. These activities can be completed independently. Answers to the activities are provided in the subject notes or the Subject Room so that students can assess their level of knowledge. Discussion Forum topics Discussion Forum topics can be accessed directly through the eBook or via the Subject Room. They offer students the opportunity to participate in structured or unstructured discussions with other students, facilitated by an industry practitioner who is an expert in the field. Students can build their knowledge and understanding as well as contribute to the learning of others. FIN229.SM1.2 1 Introduction to futures and options markets Overview 1.1 Topic learning outcomes ..................................................................1.1 Required readings ...........................................................................1.1 Further resources ............................................................................1.1 1 1.1 1.2 Derivatives 1.2 Key features of derivatives ......................................................1.2 Exchange traded versus over-the-counter derivatives..................1.2 2 2.1 2.2 2.3 2.4 2.5 Futures 1.4 Historical perspective .............................................................1.5 Buyers versus sellers..............................................................1.6 Risk management function ......................................................1.6 Benefits of futures markets .....................................................1.6 Physical delivery versus cash settlement ..................................1.8 3 3.1 3.2 3.3 3.4 3.5 Options 1.9 Historical perspective ...........................................................1.10 Benefits of options ...............................................................1.10 Key elements of an option contract ........................................1.10 Buyers versus sellers............................................................1.12 Risks in using options...........................................................1.12 4 4.1 4.2 4.3 4.4 4.5 Market structure 1.13 Initial margins ......................................................................1.13 Variation margins .................................................................1.13 Counterparty risk ..................................................................1.14 Market participants...............................................................1.14 Contract specifications .........................................................1.15 5 5.1 5.2 5.3 Market regulation 1.16 ASX Participation ..................................................................1.16 Licensing of industry participants ...........................................1.16 Compliance in derivatives trading...........................................1.17 6 6.1 6.2 6.3 International derivatives markets 1.21 The United States.................................................................1.21 Europe.................................................................................1.21 Asia-Pacific ..........................................................................1.21 Suggested answers 1.23 Topic 1: Introduction to futures and options markets Overview To many people, futures and options trading is a complicated business which is beyond their experience or understanding. However, this subject will illustrate, the basics are relatively easy to comprehend and master. This topic sets the scene for Futures and Options Markets and Trading (FIN229) by introducing many of the futures and options trading concepts which are discussed in more detail in the topics that follow. This topic introduces the main types of futures and options; the markets in which they are traded; how they are priced; and what they are used for. While futures and options are traded over many underlying instruments (e.g. commodities, equities, interest rates and currencies) and in many different countries, the basic concepts underlying a future or an option are essentially the same across all underlying instruments and in all countries. This topic specifically addresses the following subject learning outcomes: • Outline the structure and operation of the global futures and options markets. • Describe the legal and regulatory framework of the futures and options market. Topic learning outcomes On completing this topic, you should be able to: • define futures and options in the context of financial markets • discuss reasons why futures and options are used • distinguish between exchange-traded and over-the-counter derivatives • describe the key elements of a futures contract • describe the key elements of an options contract • identify the different types of users of futures and options • describe the benefits of using derivatives for hedging and speculative purposes • understand regulation as it applies to futures and options trading. Required readings All required readings are assessable content for this subject. Readings may be found in a prescribed textbook, a Kaplan Library database, a website or reproduced at the end of this topic: 1. Contract specifications are available from the ASX website, < ;. Under ‘ASX Products’, select ‘Futures and Options’, then ‘Interest rate Futures and Options’. Under ‘Trading info’, select ‘Contract Specifications’. Further resources • ASX 2009, Options — A simple guide, Australian Securities Exchange. Available from: < ;. Under ‘Education and Resources’, select ‘Education’ and then ‘Documents and publications’. © Kaplan Higher Education 1.1 1.2 Futures and Options Markets and Trading (FIN229) 1 Derivatives Derivatives are financial instruments which derive their value from an underlying instrument or asset. They comprise futures and options and are widely traded products, helping to provide depth and liquidity in our financial markets. Derivatives were introduced in Topic 8 of Financial Markets and Economic Principles (FIN111) which students should revise before commencing this topic. Key concept: Derivative financial instrument A derivative financial instrument is a contractual relationship established by two (or more) parties where payment or exchange of cash flows is based on (or derived from) some agreed ‘underlying instrument’. Generally speaking, underlying instruments include equities, commodities, interest rates (products), currencies and indices. To understand derivatives it is essential to understand the underlying instruments. Many of the underlying instruments were covered in Financial ...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture