Derivatives are contracts that “derive” their value from an underlying asset. They come in a variety of forms including forwards, futures, options, and swaps. The importance of these markets is attested to by the fact that summed together the notional amounts outstanding of over-the-counter derivatives alone was USD 640 trillion as of the end of June 2019. The reason for the success of these markets is that derivatives provide corporations, institutions, and individuals with an infinite array of return/risk opportunities to manage the price risks associated with individual stocks, stock portfolios, bonds, currencies, interest rates, commodities, and credit.

The objective of the course is to provide students with a working knowledge of derivative contract markets, valuation, and risk management. The course begins by providing a description of derivative markets and why they exist. The focus then turns to valuation. The reason is that it is only through understanding valuation and its assumptions that risk exposures can be measured. And, it is only through accurate risk measurement that risk can be managed. With the tools of valuation and risk measurement in hand, the focus then turns to a variety of actual valuation and risk management problems faced by individuals, firms, institutions, and governments. Included among them are hedging commodity price risks, valuing employee stock options, designing stock price collars, creating passive and dynamic portfolio insurance, structuring protected equity notes, managing interest rate risk exposures, swapping fixed for floating interest rate payments, and managing currency risk exposures. Whenever possible, current derivatives market-related issues are integrated into classroom discussions.


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©2020 by Robert E. Whaley.