ICM211-Derivative Securities: Pricing, 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: 2023/4

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 of equity options portfolios on ICTrader. There are also 4 practical Excel based case studies (Option Strategist) which focus on option value and risk analysis. 



The course is designed to give students a basic practical working knowledge of the pricing 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, it is expected that the student will be able to  

  • Explain the underlying principles of option pricing models; 

  • Analyse the fundamental risk exposures associated with any options portfolio; 

  • Interpret the different volatilities associated with options and implement (and understand) successful volatility trading strategies; 

  • Understand and be able to implement hedging strategies in the face of changing market conditions; 

  • Trade as option market makers 

Additional outcomes:

Outline content:

Review of Option Basics; Synthetic Futures; Option Pricing Principles (the riskless hedge approach) ; Option Price Sensitivities (Risks and Trading Applications)-managing long/short Gamma, long/short Vega, long/short Theta, Delta long, Delta short, Delta neutral; Volatility: trading actual and implied volatility; Volatility Smiles; Volatility Spreads: straddles, strangles, butterflies, ratio vertical and back-spreads,  Bullish/bearish vertical spreads, time (calendar) spreads, condors, ; Trading Strategies-basic financial engineering using the Chicago Mercantile Exchange Strategy guide.


Global context:

The option risk management techniques are applicable to any option market.

Brief description of teaching and learning methods:

Core lectures supported by Excel based option/volatility spread analysis/case studies, and equity option trading/hedging trading simulations using ICTrader.

Contact hours:
  Autumn Spring Summer
Lectures 18
Seminars 18 4
Guided independent study:      
    Wider reading (independent) 40
    Exam revision/preparation 90
    Advance preparation for classes 20
    Preparation for seminars 10
Total hours by term 0 196 4
Total hours for module 200

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

Summative assessment- Examinations:

One 3 hour closed book examination, May/June.

The examination for this module will require a narrowly defined time window and is likely to be held in a dedicated exam venue.

Summative assessment- Coursework and in-class tests:

The practical skills assessment consists of two option trading tests each of which count for 5% of the total module grade. 

The class test is a 2 hour 35 question multiple choice test. 

Both the practical skills assessment and the class test usually take place in the first two weeks of the summer term.

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


Assessment 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: £20- £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: 30 March 2023


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