University of Manitoba - FIN 4270: Options and Futures (Solutions)

FIN 4270: Options and Futures is a course that focuses on the mechanics of futures, options, and swaps markets. Key topics covered in this course include arbitrage, hedging, forward rate agreements, models of derivative valuation, and value-at-risk.

Main topics to be covered:

• Mechanics of futures, options, & swaps markets: Exploring the realm of derivatives, these markets revolve around trading financial instruments that obtain their value from underlying assets. Futures represent standardized contracts traded on exchanges, outlining the size, delivery time, and price of a commodity. Options provide the holder the choice, but not the requirement, to buy or sell an asset at a specified price before the contract's expiration. Swaps consist of contracts between two parties agreeing to exchange cash flows in the future based on a pre-established formula.
• Arbitrage: This trading approach takes advantage of small price discrepancies between identical or similar assets across two or more markets. By purchasing the asset in one market and selling it in another at a higher price, traders profit from the temporary price difference. Arbitrage opportunities typically last for a short period and necessitate large trading volumes to yield significant returns.
• Hedging with futures & forwards: Serving as a risk management strategy, hedging aims to safeguard investments or portfolios from potential losses. Futures and forwards are derivative contracts utilized for hedging purposes. A short hedge involves taking a short position in a futures contract to protect against falling prices, while a long hedge requires taking a long position to defend against rising prices. These contracts aid in reducing the risk of unfavorable price movements in the underlying asset.
• Forward rate agreements: These over-the-counter contracts between parties determine the interest rate to be paid on a future date. Forward rate agreements help manage interest rate risk by locking in a fixed interest rate for a future loan or investment. The notional amount is not exchanged; rather, a cash amount based on the rate differentials and the notional value of the contract is settled.
• Models of derivative valuation: Utilizing mathematical models, derivative valuation calculates the fair value of derivative contracts, such as options and futures. Various models, including the Black-Scholes model, price derivatives based on factors like the current price of the underlying asset, the strike price, the time to expiration, and the risk-free interest rate.
• Value-at-risk (VaR): As a statistical measure, VaR estimates the potential loss of a portfolio over a specific time horizon and at a given confidence level. It helps investors and portfolio managers evaluate the risk associated with their investments in options, futures, and other financial instruments. VaR calculations consider the historical price volatility of the assets in the portfolio and the correlations between them.

ACC 1100  

ACC 2010  

ACC 2020