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Derivative Securities

Unit code: BMAN70141
Credit Rating: 15
Unit level: Level 7
Teaching period(s): Semester 1
Offered by Alliance Manchester Business School
Available as a free choice unit?: N



Additional Requirements

This course, or similar course at UG level, must be undertaken if you wish to take BMAN70192 Real Options in Corporate Finance in Semester 2


The course equips students with essential techniques useful for valuing financial derivatives and hedging financial risk. The course emphasizes the general principles central to derivatives valuation, including no-arbitrage arguments and risk-neutral valuation methods, together with their implications for the pricing of financial derivatives. It also discusses some more advantage topics, such as valuing derivatives using Monte-Carlo simulations and finite difference methods or calculating a financing institution’s value at risk (VaR). All concepts are discussed from an intuitive (not a rigorous) perspective.   


This course introduces students to important financial derivatives. The course starts off with more basic material, such as forwards, futures, and plain-vanilla options. In that part of the course, students learn how these derivatives are defined, in which markets they are traded, and for what purposes they can be used. The course also derives several important arbitrage bounds and valuation formulas using either binomial trees or continuous stochastic processes. The course then moves on to more advanced material. Among the more advanced material is the valuation of complex derivatives using numerical methods (such as Monte-Carlo simulation, finite difference methods, and the Longstaff-Schwartz method), delta-hedging, and value-at-risk (VaR).

The course is taught via ten two-hour lectures. There are no tutorials or workshops. There is however a large amount of self-study material online (including last year’s exam papers). The course is assessed with a (closed-book) exam and a coursework assignment. In the coursework assignment, students work in groups to use numerical methods to value complex derivatives.

Learning outcomes

On completion of this unit successful students have

  • Be familiar with the most common derivative contracts traded in financial markets;
  • Have some broad knowledge about how derivative contracts have developed over time, are quoted in the financial press, are traded in financial markets, etc.;
  • Be able to understand, from an intuitive perspective, how derivative securities are valued, using either replication approaches or risk-neutral valuation approaches;
  • Be able to understand how derivative securities can be used in financial markets to either increase (speculate) or decrease risk (hedging);
  • Be able to solve standard exercises involving the calculation of derivative values/prices or the optimal number of derivative contracts used for hedging purposes;
  • Be able to use Monte-Carlo simulations and the implicit and explicit finite difference method to value more complicated (exotic) derivatives;
  • Be able to use the simulation or the model-building approach to calculate value-at-risk;
  • Be able to exercise a capacity for independent and self-managed learning;

Assessment Further Information

Coursework project (25%)

Written Examination (75%)

Recommended reading

The recommended text for the course is:

Hull, J. 2014. Options, Futures and other Derivatives, 9th Edition, Prentice Hall.

The relevant chapters to read in this text are detailed below.  The website linked to the textbook is: http://www.rotman.utoronto.ca/~hull

Feedback methods

  • Informal advice and discussion during a lecture.
  • Online exercises delivered through the Blackboard course space.
  • Responses to student emails and questions from a member of staff.
  • Generic feedback posted on Blackboard regarding overall examination performance
  • Written and/or verbal comments on the coursework.

Study hours

  • Assessment written exam - 2 hours
  • Lectures - 20 hours
  • Independent study hours - 128 hours

Teaching staff

Kevin Aretz - Unit coordinator

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