University of North Carolina at Greensboro



THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO

Joseph M. Bryan School of Business and Economics

Department of Accounting and Finance

FIN 350 (Derivatives) – Spring 2008

I. Meeting Time and Place

FIN 350.01, 12:30 p.m. – 1:45 p.m. TR, Bryan School (Room 111)

II. Instructor

Daniel T. Winkler, Ph.D.

Office: 473 Bryan School

Phone: 256-0122

E-mail: dt_winkler@uncg.edu

Blackboard: (Used extensively in this course)

Office Hours: 2:00 pm – 2:30 pm TR and by appointment.

III. Prerequisites

Prerequisites: Grade of C or better in ACC 218 and FIN 315; junior standing; admission to an approved program of study in the Bryan School. Students who do not have all of these prerequisites may be dropped from the class anytime during the semester.

IV. Course Materials

Required:

Robert A. Strong. Derivatives: An Introduction, 2nd Edition, South-Western Publishing (Thompson Learning), 2005.

HP (Hewlett Packard) 10 B II, 17BII financial calculator or the equivalent.

. Recommended:

CBOE Options Toolbox 5.0. This software is free from the Chicago Board of Trade. It does a fine job of graphing option strategy, finding option prices, and calculating option “Greeks” but it’s a bit quirky and has some printing limitations.

The Wall Street Journal. Reading The Wall Street Journal will help you develop a practical understanding of finance.

V. Course Description and Purpose

The UNCG Undergraduate Catalog describes FIN 350 as follows:

"Investigation of risk and financial risk process including portfolio insurance. Topics include options, futures, hedging, decision trees, and sensitivity analysis."

The learning outcomes from this course are as follows:

1. Identify and define the different meanings of risk, the types of risk and the risk management process and methods including the role of insurance. Review basic principles of statistics as it relates to stand-alone and portfolio risk.

2. Identify and define the major type of derivatives, the participants in the derivative world, and the uses of derivatives.

3. Understand the basics of financial options including the characteristics, where they come from, the opening and closing transactions, and the Options Clearing House.

4. Understand the use of options as a hedge, to generate income, profit and loss diagrams and uses to improve the market.

5. Understand basic option combinations and spreads.

6. Understand the Black-Scholes Option Pricing Model including the input factors, assumptions and important concepts and definitions.

7. Identify and define the principal option pricing derivatives or “greeks” such as delta, theta, and gamma.

8. Understand the fundamentals of the futures market including market participants, futures contracts, market mechanics, the clearing process, pricing and spreads.

9. Understand stock index futures including the markets, speculative and hedging uses, as well as its role in changing systematic portfolio risk.

10. Understand the principles of foreign exchange futures including the types of foreign exchange risk, dealing with risk, parity theorems, and the risk management process.

VI. Class Organization, Procedures and Expectations

This class is difficult for most students; it requires good analytical skills and some mathematical problem solving. To do well, it is a subject that most students must study regularly instead of waiting until the last minute to cram.

Therefore, I have the following expectations of you:

- Read the assigned book material and PowerPoint slides before each lecture.

- Work the assigned lesson plans and homework problems before I go over them in class.

- Devote at least six to nine hours a week outside of class for studying.

- See me as soon as you encounter difficulties.

- Participate in class discussions.

- Have a positive attitude about learning and be respectful of others.

- Be on time for class and have good attendance.

In return, I pledge to:

- Be on time and prepared for class.

- Be organized in my lectures as well as in the general conduct management of the class.

- Provide you with information in advance so you can schedule your work.

- Clearly explain concepts and problems.

- Be ready and willing to help you understand the material in and out of class.

- Treat you fairly with respect to exams, grading, etc.

- Be respectful of you and to have a good attitude.

- Provide timely feedback on assignments and exams

The Bryan School has adopted guidelines for faculty and students which can be found at . We will adhere to these guidelines.

A large portion of class time is devoted to lecture and discussion. Therefore, individual study and preparation outside of class are extremely important to your success. The lectures will highlight important concepts in the text, however, an in-depth lecture of each topic is not possible given time constraints. Be sure to bring your textbook, a financial calculator, and lecture outline to each class so you have everything you need to get the most out of the lectures and problem discussions. After completing the lecture for each chapter, we will go through the solutions to selected assigned problems (at the end of the chapter).

VII. Course Grading

There will be three exams during the semester including a cumulative final exam. The exam schedule is as follows:

Date/Time of Exam

Midterm Exam 1: 2/14

Midterm Exam 2: 3/27

Cumulative Final Exam: 5/10 (Saturday) (12:00 p.m. - 3:00 p.m.)

The general format of the mid-term exams will be about 15 multiple-choice questions and approximately 4 short answer problems. The cumulative final will have about 50% to about double the amount of more questions and problems. The multiple choice questions may include definitions and math problems as well as concepts. The end-of-chapter questions and problems will be very helpful for doing well on the exam multiple choice questions.

Although most of the questions on each exam will come directly from chapters assigned since the last exam, some questions may be taken from earlier chapters as they relate to the current chapter material. In that sense, all exams are cumulative.

There are no makeup exams. The weight attributable to a missed exam will be allocated to the final exam. Unless you have received special permission from me, you are not permitted to take an exam in one of my other classes. If you plan to take an early exam, notify me at least 48 hours prior to the exam. Failure to notify me regarding your absence for an exam within 24 hours after the scheduled exam will result in an F grade (exam score of zero). In the event you miss an exam for medical or psychological circumstances, you must provide me with written verification. During the regular semester, students with more than two final examinations within 24 hours may apply to the Registrar's office for permission to change. You need to show me a note from the registrar's office or from the advising office (Room 232) to reschedule the final exam. The usual policy is to change the middle final examination in a sequence of three. All requests for changes in examinations must be filed with the Registrar's Office by Reading Day.

In the event of a fire alarm or bomb threat, I will collect the exams and we will proceed outside the building. If an alternate test site is available and we can quickly reassemble, you will complete the exam at that site. If not, I will give you time the following class period to complete the exam.

In the event of inclement weather, the class will follow University Policy. Class is cancelled by order of the Chancellor. The status of classes with regard to inclement weather is posted on the UNCG web page and also announced in the media. In the event an exam is scheduled (or an assignment due), it will be moved to the next class period.

VIII. Excel Assignment and Write-Up

Using Excel is important for the finance professional. An assignment of this class is that you use a spreadsheet to calculate the value of a call and put option using the Black-Scholes OPM, and graph the option intrinsic and theoretical values. The assignment is due at the beginning of class on Thursday, November 15th. A handout that explains the details of the assignment will be distributed in class. Late assignments will receive a grade penalty of 20 points per day. No assignments will be accepted after the next class meeting.

IX. Homework Quizzes

Doing the homework is essential to gaining an understanding of finance; students who fail to do the homework usually do poorly in the class. Therefore, I will give you a short quiz (about 5-10 minutes) at the beginning of the next class AFTER we have completed a chapter. The quiz will cover one or more homework problems and perhaps concepts. Homework problems will appear virtually verbatim on the quiz. There should be about six or seven quizzes, and one quiz will be dropped. (Quizzes will be omitted on chapters that immediately precede an exam, and also, there is no quiz on Chapter 1). There are no makeup quizzes and early quizzes are scheduled at the instructor’s convenience.

X. Attendance and Participation

Attendance is expected in this class, and therefore, I will keep an attendance record. I do not have a grade penalty for missing class, however, it is my experience that students who do not attend regularly do poorly on exams and assignments. Please keep in mind that you are responsible for any announcements made during class even if you absent.

Participation is important in this class. Please be ready to ask questions and discuss topics from the lecture. As a prerequisite, please be sure to do the assigned readings and problems before class. Occasionally, I may take about 5-10 minutes in the beginning of class to briefly discuss important articles in The Wall Street Journal.

I will have assigned seating to make attendance and participation monitoring easier. Therefore, please choose a permanent seat within two class meetings. The door will be left ajar for a few minutes after class begins, however, for the convenience of attending students, it will be closed once the lecture has started. PLEASE DO NOT KNOCK ON THE DOOR ONCE IT HAS BEEN CLOSED! If you must leave early, please let me know before class begins.

XI. Course Grading

Your final grade you receive in this class largely depends on your grades on exams, quizzes and an Excel assignment and write-up. The course requirements have the following grade weights:

Graded Assignment % of final grade

1st Exam 20

2nd Exam 20

Cumulative Final Exam 30

Homework Quizzes 20

Excel Assignment and Write-Up 10

Adherence to the Academic Integrity Policy is expected and required of all students for all exams and assignments. Failure to abide by this policy will result in disciplinary action. Details of the Academic Integrity Policy are available at .

Although a student’s attitude is not explicitly weighted above, it may be considered in the determination of the final grade. Discourteous and/or unprofessional behavior to me and/or fellow students may adversely affect a student’s grade (up to one letter grade). Once everything is taken into consideration, the numerical score is rounded no more than one-half point to determine your letter grade. (The exception is the A+ grade which is not rounded). Once final grades are submitted, I will not change grades based on subjective considerations or re-grade old exams or assignments.

The final grading scale is as follows:

Letter Numerical Letter Numerical

Grade Score Grade Score

A+ 98-100 C 72-77.9

A 92-97.9 C- 70-71.9

A- 90-91.9 D+ 68-69.9

B+ 88-89.9 D 62-67.9

B 82-87.9 D- 60-61.9

B- 80-81.9 F < 60

C+ 78-79.9

FIN 350 CLASS SCHEDULE

Topic/Assignment (NOTE: Other problems, questions and/or reading may be added)

Overview of Derivatives:

1. The Role of Derivatives (Chapter 1 and Appendix)

2. Fundamentals of the Futures Market (Chapter 8)

End of Chapter 8: 1, 6, 7, 10, 11, 13, 15, 16

3. Basic Principles of Stock Options (Chapter 2)

End of Chapter 2: 2, 5, 7, 14, 19, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 41, 42, 46, 47

Option Pricing:

4. Option Pricing (Chapter 5) (Read pp. 44-45 in Chapter 2 before reading Chapter 5)

End of Chapter 5: 6, 7, 8, 12, 13, 15, 16, 19, 22, 24, 26, 27, 29

5. The Black-Scholes Option Pricing Model (Chapter 6)

End of Chapter 6: 1, 2, 3, 4, 5, 8, 9, 14, problems handout

6. Option Greeks (Chapter 7; pp. 147-153 only)

End of Chapter 7: 1, 2, 3, 22, 23, 29

Option Strategies:

7. Basic Option Strategies: Covered Calls and Protective Puts (Chapter 3)

End of Chapter 3: 1, 2, 5, 8, 10, 12, 17, 18, 19, 21, 24, 25, 27

8. Option Combinations and Spreads (Chapter 4; pp. 58-61, 64-66, 68)

End of Chapter 4: 1, 3, 7, 9, 16, 17, 18, 19, 27

Financial Futures:

9. Stock Index Futures (Chapter 9)

End of Chapter 9: 1, 4, 7, 8, 11, 12, 13, 14, 15, 16, 17

10. Foreign Exchange Futures (Chapter 10)

End of Chapter: 2, 3, 6, 7, 9, 12, 15, 16, 17

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