IC315-Advanced Derivative Securities Hedging and Trading

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Current from: 2021/2

Module Convenor: Dr Mike Smith
Email: m.j.smith@icmacentre.ac.uk

Type of module:

Summary module description:

This is a very practical course focusing mainly on option/volatility trading and risk management. The seminars all take place in the dealing room, and students will manage the risk, as market makers, of equity options portfolios on ICTrader. 


The course is designed to give students a basic practical working knowledge of the hedging and trading of derivative securities, and in particular options. Most textbooks on the subject are either too mathematical/theoretical or too practitioner oriented, and this module attempts to bridge the gap between the two. By the end of the course students should be able to “speak the language” of the derivatives market whilst at the same time have an intuitive grasp of the subject. Whilst option theory is of obvious importance, the emphasis of this course is on practical application – in particular, we will look at the time/risk dynamics of options in a trading environment. The derivatives industry impacts on all sectors of investment banking, and whether or not students choose a career in derivatives trading/sales/research, they will find this course extremely useful. The overriding philosophy of the course is: “learning by doing”. 

Assessable learning outcomes:

By the end of the module, students will be able to: Manage the risk of an equity options portfolio in a simulated trading environment; Understand and know how to apply the option Greeks as a market maker; Be able to implement volatility trading strategies; Construct volatility trading positions using basic financial engineering; Understand basic exotic option structures; Appreciate the importance of the VIX index and volatility smiles 

Additional outcomes:

Outline content:

Topic 1: Review of Futures and Forwards and Option Basics

Topic 2: Option Price Sensitivities "The Greeks": Risks and Trading Applications

Topic 3: Volatility and Volatility Spreads

Topic 4: Financial Engineering with Volatility Spreads

Topic 5:An Introduction to Exotic Options

Topic 6: The VIX Index and Volatility Smiles

Global context:

Options and derivatives are traded in all asset classes on a global basis. An understanding of the risks associated with this asset class is critical in helping to understand the types of risks which global institutions are exposed to through their use of derivatives to speculate, hedge or engineer. 

Brief description of teaching and learning methods:

The central learning method of this module is "learning by doing" and uses a combination of lectures and applied dealing room seminars. The latter are designed to allow the students to put into practice the trading and risk management concepts taught in the lectures. During the seminars, students manage the risk of an equity options portfolio in a dynamic trading environment. The students have remote access to the simulation so that they can further develop their understanding outside the classroom environment. The students also use a dedicated options analysis spreadsheet to analyse option spreads under varying market conditions. Handouts are provided. Students are made aware of information available on the internet about derivative contracts and exchanges. 

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 20
Guided independent study:      
    Wider reading (independent) 40
    Exam revision/preparation 90
    Advance preparation for classes 20
    Preparation for seminars 10
Total hours by term 0 200 0
Total hours for module 200

Summative Assessment Methods:
Method Percentage
Written exam 70
Practical skills assessment 10
Class test administered by School 20

Summative assessment- Examinations:

One 1.5 hour unseen written paper

Summative assessment- Coursework and in-class tests:

One 1.5 hour class test (20 Multiple choice question). Beginning of Summer term. 

One trading test (practical skills assessment). End of Spring term 

Formative assessment methods:

Penalties for late submission:

The Support Centres will apply the following penalties for work submitted late:

  • where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days;
  • where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.
The University policy statement on penalties for late submission can be found at: http://www.reading.ac.uk/web/FILES/qualitysupport/penaltiesforlatesubmission.pdf
You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Assessment requirements for a pass:

A minimum mark of 40%. 


Reassessment arrangements:

Re-examination for Finals takes place in August/September  

Additional Costs (specified where applicable):

1) Required text books: £25-£45 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: 8 April 2021


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