Introduction to Binomial Trees
Lecture 7
7-1
Todays Topic
How can we determine the options price with
binomial trees? (chapter 11)
7-2
Binomial Tree
A diagram that represents different possible paths that might
be followed by the stock price over the life

A derivative: an instrument whose value depends on the values of other, more basic, underlying variables.
Ways used: hedge risks, speculate, lock in an arbitrage profit, change the nature of a liability/ investment
Forward Contracts (traded in OTC markets

Section A (40%)
1)
Which of the following will not lead to IBM issuing more shares
(a). Some executive stock options are exercised
(b). Some exchange-traded options are exercised
(c). Some warrants on IBM are exercised
(d). Some of IBMs convertible debt i

Form 2B
City University of Hong Kong
Information on a Course
offered by the Department of Economics and Finance
with effect from Semester A in 2014 / 2015
Part I
Course Title: Derivatives and Risk Management
Course Code: EF5050
Course Duration: 1 semester

EF4321 Semester A 2016-2017
Assignment 1, Due on Oct. 6th for Thursday class, Oct. 7th for Friday class
1.
(10 points) A trader buys a European put on a share for $3. The stock price is $42 and the strike price is
$40. [1] Under what circumstances does th

Hedging with Futures and
Forwards & Interest Rates
Lecture 3
Topics
Hedging strategies using futures (chapter 3)
Interest rates (chapter 4)
3-2
Long & Short Hedges
A long futures hedge is appropriate when
you know you will purchase an asset in the
future

Option Pricing, Delta Hedging and
Portfolio Insurance
Lecture 9
9-1
Todays Topics
Prices of options on a stock paying a known
dividend yield: chapter 16.1-16.2
Delta hedging: chapter 18
Portfolio insurance: chapter 18 & chapter 16.3
9-2
European Options o

Derivatives & Risk Management
Lecture 1
1-1
The Nature of Derivatives
A derivative is an instrument whose value
depends on the values of other, more basic,
underlying variables.
Derivatives can be dependent on almost any
variable, from the price of hogs t

Option Prices, Delta and
the Black-and-Scholes
Model
Lecture 8
8-1
Todays Topics
A little bit more on binomial modeling: How
can we use it for risk management?
The alternative to binomial trees: analytical
solutions to option prices and deltas.
Example: t

Mechanics of Options
Markets
Lecture 5
Options
A call option is an
option to buy a certain
asset by a certain date
for a certain price (the
strike price).
A put is an option to
sell a certain asset by
a certain date for a
certain price (the
strike price).

Swaps and Risk Management
Lecture 4
Topics
Swaps (chapter 7)
Managing foreign exchange risk with swaps
Managing interest rate risk with swaps
4-2
Nature of Swaps
A swap is an agreement to exchange cash
flows at specified future times according to
certain

Credit Risk and Credit Risk
Management
Lecture 11
11-1
Topics
Measuring credit risk
Credit risk management (chapter 20)
Credit Derivatives (chapter 21)
11-2
Credit Risk
Credit Risk: The risk that a debtor does not
fulfill its obligations, either wholly or

Futures and Forwards
Lecture 2
Topics
Mechanics of Futures Markets
(Chapter 2)
Determination of Forward and Futures
Prices (Chapter 5)
2-2
What are Forwards and Futures?
Both are agreements to deliver (or take
delivery of) a specified asset on a future d

How derivatives are used: hedge risks, speculate, lock in an arbitrage profit, change the nature of a liability/ investment |
3 types of traders Hedgers use derivatives to reduce the risk that they face from potential future movements in a market variable