Derivatives

URL study guide

https://studiegids.vu.nl/en/courses/2025-2026/E_FIN_DER

Course Objective

The primary objective of this course is to provide students with an advanced introduction to derivative instruments. By the end of the course students should have a sound understanding of pricing concepts, practical applicability, risk management concepts related to derivatives and implementing such concepts in a programming language.

Course Content

In todays financial world, the role of derivatives gets increasingly important. Banks and pension funds use derivatives to manage their balance sheet risk, corporate treasuries need derivatives for mitigation of international trade risk, insurance companies actively apply derivatives strategically in order to hedge long term interest rate exposures. Worldwide derivatives trading has exploded to unprecedented levels in the last decades. Therefore, a sound understanding of derivatives is indispensable for anyone pursuing a job in finance. The course aims to help students in developing a general understanding of the fundamental principles related to derivative instruments. When we try to understand derivative instruments we will ask questions like:How do derivative instruments work?Is it possible to decompose derivatives in basic assets?How to determine the fair value of derivative instruments?What are the risks of using derivative instruments?How are derivative instruments applied in practice and are there any relevant operational issues in the real world?Hence, the course focuses on facilitating conceptual understanding of derivative instruments and of the methods that are needed to apply derivatives in different settings of finance applications; whether it is for trading purposes, structuring products, risk management, etc. Applying methods such as e.g. pricing or hedging derivatives to practical applications knowledge of programming is absolutely necessary. In separate tutorial sessions we will implement theoretical concepts discussed in class using in a programming language to make them available for finance applications. The field of derivatives is one of the most mathematically sophisticated in finance. Therefore, to understand derivatives it is inevitable to deal with mathematical methods. However, we want to emphasize that in the course mathematical methods are primarily used as tools to understand derivatives. We intend to serve a balanced mix of theory, intuition and practical aspects. The course will treat the following subjects:Why derivatives?Forwards, futures and optionsPricing concepts of derivative instrumentsDiscrete and continuous time option pricing modelsUnderstanding Black-Scholes formulaBeyond Black-Scholes (stochastic volatility and jumps)Hedging strategies

Teaching Methods

The course spans a period of six weeks. There will be a mixture of content driven lecture type sessions and Q&A tutorial like sessions, in which the course material is presented and practiced.

Method of Assessment

The final grade of the course is achieved by solving course-content based problems in final exam.

Literature

Lecture slidesJohn Hull: Options, Futures and other Derivatives, 11th Edition, 2021Further References:Das, R.K. and S.R. Sundaram: Dervatives: Principles and Practice, McGRAW-Hill International Edition, 2nd ed., 2017Jarrow, R. and A. Chatterjea: An Introduction to Derivative Securities, Financial Markets, and Risk Management, W. W. Norton & Company, 2013Baxter/Rennie: Financial Calculus, Cambridge, 1996.
- Neftci: Principles of Financial Engineering, Elsevier, 2nd edition, 2008.Bingham/Kiesel: Risk-Neutral Valuation: Pricing and Hedging of Financial Derivatives, Springer, 2004.Björk, T.: Arbitrage Theory in Continuous Time, Oxford University Press, 2004.

Entry Requirements

Students entering this course should be familiar with the basic corporate finance principles and techniques (e.g. Berk/DeMarzo, Corporate Finance) and investment management concepts (e.g. Bodie et al, Investments). It is important to notice that this course is not an introductory course to derivatives, but rather an advanced introduction. To follow the course students need to have understanding of the basic concepts of derivatives already. In order to follow the course material right from the start it is recommended to review the derivatives material that has been covered in the bachelor finance courses. Furthermore, before the course starts a slides set will be made available that consists basic material. This material is the starting point of the lecture and students are required to have mastered such material to be able to actively use in during the course at all times.