FIN 4021
Michael Ferguson
Hedging Strategies
Using Futures
Key Concepts and Skills
Learn how to use forward and futures contracts to hedge long
and short exposure
Be able to compute the optimal hedge ratio and the optimal
long/short position
Learn how to

FIN 4021
Michael Ferguson
Swaps I: Interest Rate and
Currency Swaps
Key Concepts and Skills
Learn the mechanics of interest rate and currency swaps,
including the role of financial intermediaries and the source
of credit risk in swaps transactions
Be able

FIN 4021
Michael Ferguson
Details of Oprah Winfrey
Hedging Example
Key Concepts and Skills
I will show you the details of how the 1670 long position in
Index Futures causes Oprah Winfreys $750 million portfolio
to act as though it has a =1.6 instead of =1

FIN 4021
Michael Ferguson
Swaps II: Equity, Total Return,
and Credit Default Swaps
Key Concepts and Skills
Learn the structure of equity, total return, and credit default
swaps
Understand the economic purpose of these types of swaps
Be familiar with how c

FIN 4021
Michael Ferguson
Futures Valuation
and the
Cost of Carry Model
Key Concepts and Skills
Be able to value forward contracts when the underlying asset
does not pay dividends.
Be able to value forward contracts when the asset pays a known
dividend.
U

FIN 4021
Michael Ferguson
Futures Pricing
and Index Arbitrage
Key Concepts and Skills
Know how to find the price of a forward contract when the
underlying asset does not pay dividends.
Know how to find the price of a forward contract when the
asset pays a

FIN 4021
Michael Ferguson
Brief Overview
of Interest Rates
Key Concepts and Skills
Be familiar with Treasury rates and zero coupon rates
Be able to explain the importance of LIBOR and why OIS
rates are starting to be used as the risk-free rate
Be able to

FIN 4021
Michael Ferguson
Mechanics of Forward and
Futures Markets
Key Concepts and Skills
Be familiar with the basic terminology and terms of forward
and futures contracts
Understand the difference between forward contracts and
futures contracts
Understa

FIN 4021
Michael Ferguson
Introduction to Derivatives
Key Concepts and Skills
Be familiar with the main uses of derivatives contracts
Understand the difference between notional value and market
value
Understand the key drivers of forward/futures prices an

FIN 4021
Michael Ferguson
The Bookmakers Parable
Key Concepts and Skills
Understand how betting odds translate into probabilities
Understand how bookies can set odds to guarantee a riskless
profit
Understand the parallel between setting betting odds and
p

FIN 4021
Michael Ferguson
Pricing and Valuing Swaps
Key Concepts and Skills
Be able to compute the zero rates used to forecast the floating
rates in a swap.
Be able to compute the fixed rate in a swap.
Be able to determine the value of an interest rate sw

FIN 4021
Michael Ferguson
Mortgage Backed Securities
Key Concepts and Skills
Understand the major risk associated with sub-prime mortgages:
credit risk
Be familiar with the governmental and quasi-governmental
agencies that dominate the mortgage market: Gi

FIN 4021
Michael Ferguson
Properties of Stock Options
Key Concepts and Skills
Understand
the factors that affect option prices
Understand
and be able to use Put-Call Parity
2
Introduction
Forwards and futures are considered easier to price than
options be

FIN 4021
Michael Ferguson
Black-Scholes-Merton II:
Volatility
Key Concepts and Skills
Be familiar with techniques for estimating volatility from
historical data
Understand implied volatility and be familiar with how to
estimate it
Understand what a volati

FIN 4021
Michael Ferguson
Black-Scholes-Merton I:
The Pricing Formula
Key Concepts and Skills
Understand the principles underlying the Black-ScholesMerton model of option prices
Be able to use the Black-Scholes-Merton formula to price
puts and calls
2
Bac

FIN 4021
Michael Ferguson
Binomial V:
Portfolio Insurance
Key Concepts and Skills
Understand how to create portfolio insurance and what went
wrong with that strategy in 1987
Be able to create synthetic calls and puts via dynamic
replicating strategies
2
P

FIN 4021
Michael Ferguson
Binomial IV:
Risk and Return
Key Concepts and Skills
Understand how real world and risk-neutral probabilities are
related to asset and derivative prices, respectively.
Understand how calls and puts fit into the risk/return tradeo

FIN 4021
Michael Ferguson
Binomial III:
American Options
Key Concepts and Skills
Be able to determine if calls and puts should be exercised
early
2
American Options
European Options can be exercised only at maturity. American
options can be exercised at a

FIN 4021
Michael Ferguson
Binomial II:
Asset Price Dynamics
Key Concepts and Skills
Be able to compute Up and Down factors and construct a
binomial tree
Value derivatives using multi-step trees
2
Model of the Asset Price at Maturity
We can't just assume t

FIN 4021
Michael Ferguson
Binomial I:
Introduction to Binomial Trees
Key Concepts and Skills
Understand the single-step binomial tree
Be able to price options using the replicating portfolio method
Be able to price options using the risk-neutral valuation

FIN 4021
Michael Ferguson
Trading Strategies
Involving Options
Key Concepts and Skills
Understand basic hedging strategies that utilize puts and calls
Be able to construct trading positions that profit from
forecasted directional movements in prices; e.g.

FIN 4021
Michael Ferguson
Mechanics of Options Markets
Key Concepts and Skills
Be familiar with the basic terms of put and call options
Be able to compute the payoffs and profits to long or short put
or call options positions
Understand what the intrinsic

Fall 2015
University of Cincinnati
College of Business
Finance 4021: Derivatives
Professor Michael Ferguson
Lindner Hall 415
phone: 556-7080
office hours: MW 10:15-11:30 a.m.
e-mail: michael.ferguson@uc.edu
Course Objectives:
The principal objective of th