Finance 465, Derivatives Markets I
Winter, 2008, Evanston
Prof. Robert McDonald
Finance 465, Derivatives Markets I
Winter, 2008, Evanston
Prof. Robert McDonald
| Office | Andersen 4-208 |
| Office hours | Wednesday, 3:00-4:00 or by appointment |
| Phone | 847-491-8344 |
| Fax | 847-491-5719 |
| r-mcdonald@northwestern.edu | |
This course provides an analytical overview of futures, options, swaps and other derivatives, most of which are now commonplace. We will discuss examples of how derivatives are used to solve particular problems, as well as the underlying pricing methodologies. We will make extensive use of Excel.
The mathematics will be basic (e.g. continuous compounding, solving two equations in two unknowns, elementary probability calculations), but the subject is inherently analytical. Expect numerous numerical examples. You should review basic probability.
Grades will be based on exams (three in-class quizzes and a final exam), homework, and class participation.
You are to display your name card at all times. This grade is determined by the quality of your participation. Here are things which will count as class participation:
It is possible to earn negative participation points.
These may be handed in as group assignments; the maximum size of a group for submitting written work is 4. Identical material submitted on behalf of more than 4 people will receive no credit. I drop the low problem set grade, so you may miss one problem set without penalty. Homework must be printed out. I do not accept electronic submissions.
Homework submissions should be self-explanatory. Spreadsheet printouts which require interpretation to grade will receive no credit.
Every homework must be signed by every group member.
The grade will be determined by the following formula:
 |
where XP is the participation grade, XPS the problem set grade, XQ the average quiz grade (I drop the low quiz grade), and XF the final. Notice that if you do better on the final than on the quizzes, only your final exam grade will count.
I adhere to the Kellogg policy on regrading, which is posted at the student affairs website:
http://www.kellogg.northwestern.edu/stu_aff/policies/registration.htm. Note in
particular that you have 10 days to request a regrade and the entire work is subject to a
regrade, not just the contested portion. The request must be in writing. This is a firm
policy.
The purpose of etiquette rules is to ensure that no one interferes with the learning of another. I do understand that recruiting sometimes interferes with class. Thus,
As a general rule, you may not use notebook computers or other handheld computing or communication devices in class, unless you sit in the last row. From time to time I may permit everyone to use computers for specific limited purposes. At no time are you permitted to perform any e-mail related activities or electronic messaging in class, even if you are sitting in the back row.
In addition to the usual expectations created by the honor code, there are three aspects I want to interpret and emphasize for this class:
I will cover topics in the order listed, but we may move faster or slower than indicated in the outline. If you miss class, be sure to ask a classmate for notes and updates, and also check the web page for announcements and handouts.
Banham, R., 1999, “They’re Singin’ in the Rain,” CFO, pp. 87–88.
Bible, P. R., 2004, “Letter to FASB,” http://www.fasb.org/eitf/0408CL3.pdf.
Dunbar, N., 2003, “Revealed: Goldman Sachs’ Mega-deal for Greece,” Risk, 16(7), 20–21.
Gladwell, M., 2002, “Blowing Up,” The New Yorker, pp. 162–173.
Kilman, S., 1996, “As Corn Prices Soar, A Futures Tactic Brings Rancor to Rural Towns,” Wall Street Journal.
Markets, P. C., 2001, Protecting Your Wealth: Hedging, Monetizing And Diversification Strategies, Technical report, PNC Bank.
Marthinsen, J., 2005, Risk Takers: Uses and Abuses of Financial Derivatives, Pearson Addison Wesley, Boston.
McDonald, R. L., 2006a, Derivatives Markets, Addison Wesley, Boston, MA, 2nd edition.
McDonald, R. L., 2006b, “The Role of Real Options in Capital Budgeting: Theory and Practice,” Journal of Applied Corporate Finance, 18(2), 28–39.
NICOR Solutions, 2003, “Natural Gas Marketing Material,” Insert.
Prystay, C., McDermott, D., Santini, L., and Davis, A., 2004, “How a Singapore Fuel Company Lost $550 Million in Oil Trading,” Wall Street Journal, p. A1.
Securities and Exchange Commission, 2003a, “SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup,” Press Release.
Securities and Exchange Commission, 2003b, “United States Securities and Exchange Commission, Plaintiff, v. J.P. Morgan Chase & Co.” Complaint, United States District Court, Southern District of Texas, Houston Division.
Simon, R., 2000, “With Stock Hedges, Outcomes Can Vary With the Strategies,” Wall Street Journal, p. C1.
Smith, R., 2005, “Soaring Prices – and the Consequences,” Wall Street Journal, p. R4.
Triantis, A. and Borison, A., 2001, “Real Options: State of the Practice,” Journal of Applied Corporate Finance, 14(2), 8–24.
Trottman, M., 2001, “Southwest Airline’s Big Fuel-Hedging Call is Paying Off,” Wall Street Journal, p. B4.