251.

420: Derivatives
Professor Jongsub Lee

SNU Business School

Spring 2024

E-mail: [email protected] Web: www.jongsublee.com

Office Hours: By appointment Class Hours: Tuesday 14:00-16:50
Office: 59-1 Room 608 Class Room: 58-324

Course Description
Derivative securities are securities whose payoffs are derived from the values of more funda-
mental underlying variables. Such securities have become ubiquitous in today’s Financial world:
as of year 2018, the notional outstanding of all derivatives contracts worldwide in just the over-
the-counter market is over $544 trillion representing a market value of over $9.7 trillion, and it
is estimated that over 90% of the world’s 500 largest companies use derivatives to manage their
risk.

This course is a comprehensive introduction to the world of derivative securities. We examine

futures, forwards, options, swaps, and credit derivatives. The course has two objectives:

• To understand the valuation and hedging of derivative securities at both an intuitive level
and a formal one.

• To understand the uses of derivative securities in the management of risk as well as poten-
tial dangers stemming from the use of these securities.

A number of case studies will also be used as illustrations of the concepts we develop. The
course is essentially self-contained in that no background knowledge of derivative securities is
presumed. Of course, a basic knowledge of financial markets and instruments (equity and
debt) is a must.

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Course Materials
• Lecture notes and problem sets will be available on the SNU course website.

– Problem sets are circulated with solutions. You need a (financial) calculator or excel
spreadsheet for this class.

• There is no required textbook.

• Optional textbooks, however, include

(1) John Hull, Options, Futures, and Other Derivative Securities, Pearson-Prentice Hall, the
8th or 9th Edition (HULL) and
(2) Rangarajan K. Sundaram and Sanjiv R. Das, Derivatives: Principles and Practice, McGraw-
Hill, April 2nd Edition, 2015 (SD).

– I will include chapter references for these optional textbooks in course notes, or an-
nounce them at the end of each class.
– It is not necessary to buy these textbooks. However, if you plan a career in investment
banking, HULL is the most widely used reference on derivatives in the industry, while
SD is more intuitive and has a more detailed discussion of credit derivatives.

Grading Policy
The typical SNU Business School grading scale will be used. I reserve the right to curve the
scale dependent on overall class scores at the end of the semester. The grade will count the
assessments using the following proportions:

• Class participation (10%)

• An in-term examination (40%)

• An end-of-term examination (50%)

Students who are absent for over 1/3 of the class will receive a grade of ‘F’ or ‘U’ for the course.
Moreover, students who wish to be evaluated under the S/U grade scheme should notify their
intention by midnight on March 11th, 2024. Any requests made after this deadline will not be
considered.

Course Schedule (Tentative)

Week 01, 03/04 - 03/08: Introduction to Derivatives, Futures & Forwards 1

• Readings: Chapter 1 Introduction, Chapter 2 Mechanics of Futures Markets (HULL); Chap-

ter 1 Introduction, Chapter 2 Futures Markets (SD)

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Week 02, 03/11 - 03/15: Futures & Forwards 2

• Forward Pricing and Hedging

• Forwards Vs. Futures

• Readings: Chapter 5 Determination of Forward and Futures Prices (HULL); Chapter 3

Pricing Forwards and Futures I: The Basic Theory, Chapter 4 Pricing Forward and Futures
II: Building on the Foundations (SD)

Week 03, 03/18 - 03/22: Options 1

• Payoffs & Trading Strategies

• Readings: Chapter 9 Mechanics of Options Markets, Chapter 10 Properties of Stock Op-

tions, Chapter 11 Trading Strategies involving Options, (HULL); Chapter 7 Options Mar-
kets, Chapter 8 Options: Payoffs and Trading Strategies, Chapter 9 No Arbitrage Restric-
tions on Option Prices, Chapter 10 Early Exercise and Put-Call Parity (SD)

Week 04, 03/25 - 03/29: Options 2

• Option Pricing: A First Pass

• Readings: Chapter 12 Binomial Trees (HULL); Chapter 11 Option Pricing: An Introduction

(SD)

Week 05, 04/01 - 04/05: Options 3

• Binomial Option Pricing

• Readings: Chapter 12 Binomial Trees (HULL); Chapter 12 Binomial Option Pricing, Chap-
ter 13 Implementing the Binomial Model (SD)

Week 06, 04/08 - 04/12: Options 4

• The Black-Scholes Model

• Readings: Chapter 14 The Black-Scholes-Merton Model (HULL); Chapter 14 The Black-

Scholes Model (SD)

Week 07, 04/15 - 04/19: Options 5

• The Option Greeks

• Readings: Chapter 18 The Greek letters (HULL); Chapter 17 Sensitivity Analysis: The
Option “Greeks" (SD)

Week 08, 04/22 - 04/26: In-term Exam

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Week 09, 04/29 - 05/03: Options 6

• Exotic Options

• Readings: Chapter 25 Exotic Options (section 25.1, 25.4, 25.5, 25.6, 25.7, 25.8, 25.9, 25.10,
25.12, 25.13, 25.16) (HULL); Chapter 18 Exotic Options I: Path-Independent Options, Chap-
ter 19 Exotic Options II: Path-Dependent Options (section 19.1, 19.2, 19.3, 19.4)(SD)

Week 10, 05/06 - 05/10: Interest Rate Futures & Forwards

• Eurodollar Futures

• Forward Rate Agreement (FRA)

• Readings: Chapter 4 Interest Rates (section 4.1, 4.2, 4.3, 4.7) (HULL); Chapter 6 Interest-
Rate Forwards and Futures (section 6.1, 6.2, 6.3, 6.4) (SD)

Week 11, 05/13 - 05/17: Swap

• Interest Rate Swaps (IRS)

• Readings: Chapter 7 Swaps (section 7.1–7.8) (HULL); Chapter 23 Interest-Rate Swaps and
Floating-Rate Products (section 23.1–23.7) (SD)

Week 12, 05/20 - 05/24: Credit Derivatives 1

• The Structural Credit Risk Model (Merton, 1974)

• Term structure of credit spread: investment versus junk grade assets

• Readings: Chapter 23 Credit Risk (section 23.6) (HULL); Chapter 32 Structural Models of
Default Risk (SD)

Week 13, 05/27 - 05/31: Credit Derivatives 2

• Total Return Swaps (TRS), Credit Default Swaps (CDS), Correlated Default Products

• Readings: Chapter 24 Credit Derivatives (HULL); Chapter 31 Credit Derivatives Products

(SD)

Week 14, 06/03 - 06/07: Wrap-up and/or some additional topics on credit derivatives

Week 15, 06/10 - 06/14: End-of-term Exam

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