ICM211-Derivative Securities: Pricing, Hedging and Trading

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring / Summer term module
Non-modular pre-requisites:
Modules excluded:
Module version for: 2016/7

Module Convenor: Dr Mike Smith

Email: m.j.smith@icmacentre.ac.uk

Summary module description:

The module objective is to give students a practical working knowledge of the pricing, hedging and trading of derivative securities, in particular options, via the use of trading simulations and pricing case studies/software. The emphasis of the module is on practical application and it is expected that by the end of the module students will understand and be able to analyse the time/risk dynamics of derivatives in a trading environment.

Assessable learning outcomes:
By the end of the module, it is expected that the student will be able to

  • Explain the underlying principles of option pricing models and thereby price options
  • Analyse the fundamental risk exposures associated with any derivatives portfolio
  • Interpret the different volatilities associated with options and implement successful volatility trading strategies
  • Understand and be able to implement hedging strategies in the face of changing market conditions

Additional outcomes:
The module also aims to give students an insight into the City trading environment and the price formation process via online derivatives trading simulations. Students will also learn how to “think on their feet”, an essential skill in the investment banking industry.

Outline content:

  • Review of Option Basics

  • Option Pricing

  • Option Price Sensitivities: Risks and Trading Applications

  • Volatility

  • Volatility Smiles

  • Trading Strategies

  • Currency Options

Brief description of teaching and learning methods:
Brief description of teaching and learning methods:
Core lectures supported by computer based pricing and hedging case studies and currency option trading/hedging computer simulations.

Contact hours:
  Spring Summer DL
Lectures 18   18
Tutorials/seminars 20 2 22
Other contact (eg study visits)      
Total hours 38 2 40
Number of essays or assignments 1 multiple choice test   1 multiple choice test
Other (eg major seminar paper)      

Summative Assessment Methods:
Method Percentage
Written exam 65
Practical skills assessment 10
Class test administered by School 25

Other information on summative assessment:
2 hour Multiple choice test - 25%
2 applied option trading tests (5% per test)- 10%

Relative percentage of coursework : 35%

3 hour closed book examination (3 questions from 6)- 65%

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Length of examination:
3 hour closed book examination

Requirements for a pass:
50% weighted average mark

Reassessment arrangements:
By written examination only, as part of the overall examination arrangements for the MSc programme.

Additional Costs (specified where applicable):
1) Required text books: Sheldon Natenburg- Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition, Dec 2014ISBN-10: 0071818774
2) Specialist equipment or materials:
3) Specialist clothing, footwear or headgear:
4) Printing and binding:
5) Computers and devices with a particular specification:
6) Travel, accommodation and subsistence:

Last updated: 21 December 2016

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