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PREREQUISITES FIN 320; (Math 150A is strongly suggested). PLEASE NOTE THAT THIS
COURSE MAKES EXTENSIVE USE OF MATHEMATICS (THROUGH FIRST SEMESTER
CALCULUS) AND TIME VALUE OF MONEY. STUDENTS NOT PROFICIENT IN THOSE
AREAS WILL HAVE DIFFICUTLY WITH THE MATERIAL.
CHANGES TO THE SYLLABUS MAY BE MADE DURING THE TERM STUDENTS ARE
RESPONSIBLE FOR ATTENDING CLASS AND BEING AWARE OF ANY RELEVANT
CHANGES
REQUIRED TEXTS
Derivatives Markets (3rd Edition); Robert L. McDonald
COURSE OBJECTIVE
At the end of the course, the student should be able to:
Identify features of call and put options, forward and future contracts and various swap
contracts
Solve for the payoffs and profits of derivative contracts incorporating the time value of
money
Understand how basic options can be used to create a variety of other derivatives such
as spreads, straddles, etc.
Understand put-call parity and how it can be used to create synthetic options/futures
Identify key assumptions in pricing financial derivatives
Understand how derivatives are used to manage financial risk
Prepare for financial derivatives portion of Exams FM and MFE of the Society of
Actuaries exams
STUDENT LEARNING GOALS
1. Recognize and understand the definition of key term such as: derivative, underlying
asset, over the counter market, short selling, short position, long position, ask price,
bid price, stock index, spot rate, net profit, payoff, credit risk, margin, maintenance
margin, no-arbitrage and risk-averse.
2. Evaluate an investors margin position based on changes in asset values.
3. Recognize and understand the definition of key option terms such as: call, put,
European option, American option, Bermudan option, option writer, in-the-
moneyness, covered call, put-call parity.
4. Evaluate the payoff and profit of basic derivative contracts.
5. Define and recognize key terms: forward contract, futures contract, outright
purchase, fully leveraged purchase, pre-paid forward contract, synthetic forwards,
and cost of carry.
6. Determine forward price from prepaid forward price, explain the relationship between
forward price and futures price, use concept of no-arbitrage to determine the
theoretical value of futures and forward contracts, given sufficient partial information,
use put-call parity to calculate remaining items.
7. Define and recognize the following terms: swap, swap term, prepaid swap, notional
amount, swap spread, simple commodity swap, and interest rate swap.
8. Define and recognize the definitions of the following terms: hedging, arbitrage,
diversifiable risk, non-diversifiable risk, spreads, collar width, collared stock, zero-
cost collar, straddle, strangle, butterfly, convertible bonds.
9. Explain how derivative securities can be used as tools to manage financial risk.
Explain the reasons to hedge and not to hedge.
10. Develop problem solving skills, critical thinking skills and analytical skills to be
successful on the Society of Actuaries Exam-FM, or other industry related exams.
PLANNED ASSIGNMENTS
Homework consisting of problems from the textbook and from handouts will be assigned each
Wednesday and will be due the following Wednesday. Each homework assignment will be given
a score between 0 and 5 if turned in on the due date. Homework turned in after the due date will
receive a score between 0 and 3.
Assurance of Learning (AoL) is an integral part of both our AACSB and WASC accreditation and
this statement helps keep students aware of this process. Attached is a copy of the learning
objectives for the overall BA, Business Administration program. These objectives were recently
revised by the Colleges Core Course Coordinators Council (C4) to align with the Colleges new
Mission Statement.
For more information on our College-based assurance of learning efforts, please visit the
Assessment and Instructional Support website at:
http://business.fullerton.edu/centers/CollegeAssessmentCenter/.
DISABILITY STATEMENT
If you have a disability or special need for which you are or may be requesting an
accommodation, please inform me and contact the Disabled Student Services Office,
located in University Hall 101, as early as possible in the term. For more information, the
Disabled Student Services Office can be reached by calling (714) 278-3117 or visit their
website at www.fullerton.edu/disabledservices/. Confidentiality will be protected.
Extra credit (up to a maximum of 3% of total course grade) will be given during the semester for
a variety of reasons all of which will be available to all students. Examples include: attending
guest speakers of the College; participating in student organizations; participating in
Insurance Day, and so forth.
The final examination will be Monday, May 17 from 5:00 p.m. 6:50 p.m.