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Be Englishfriendly or any other languagefriendly means that UC is taught in a language but can either of the
following conditions:
1. There are support materials in English / other language;
2. There are exercises, tests and exams in English / other language;
3. There is a possibility to present written or oral work in English / other language.
1
6.0
0.0 h/sem
36.0 h/sem
0.0 h/sem
0.0 h/sem
0.0 h/sem
0.0 h/sem
1.0 h/sem
37.0 h/sem
113.0 h/sem
0.0 h/sem
150.0 h/sem
Since year
2011/2012
Prerequisites

Objectives
In the end of this learning unit, the student must: A. Financial Markets A.1 Understand the several types of financial risk: price risk, market risk, interest rate risk and foreign exchange risk and the role of derivatives. A.2 Define a derivative and differentiate between exchange trade and over/the counter derivatives
B. Futures markets B.1 Describe the basic characteristics of futures contracts. B.2 To understand and identify the market structure and the mechanics of future markets. To define initial margin, maintenance margin, and settlement price. To describe price limits and the process of marketing to market, and compute and interpret the margin balance given the previous day balance and the new change in the futures price. B.3 To acknowledge and apply the main model of pricing. To determine the value of a futures contract. B.4 To describe the characteristics of the following type of futures contracts: stock index and currency. To calculate and interpret the price of stock index futures and currency future. B.5 Explain arbitrage and the role it plays in determining prices and promoting market efficiency B.6 To understand and apply hedging strategies and speculation strategies using derivatives. B.7 To apply portfolio management techniques using futures contracts. Demonstrate the use of equity futures contracts to achieve a target beta for a stock portfolio and calculate and interpret the number of futures contracts required. Construct a synthetic stock index fund using cash and stock index futures.
C. Forward Markets C.1 Describe the basic characteristics of a forward contract C.2 Define default risk of a forward contract C.3 Distinguish between futures and forward contracts
D. Options markets D.1 Describe the basic features of options contracts. Define European option, American option and moneyness. Identify the types of options in terms of underlying instruments. Compute and interpret options payoffs. D.2 Define intrinsic value and time value and explain their relationship. Determine the minimum and maximum value of European and American Options. Calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds. Explain how option prices are affected by the exercise price and time to expiration. Explain put call parity for European options and relate put call parity to arbitrage and the construction of synthetic options. Contrast American options with European options in terms of lower bounds on options prices and the possibility of early exercise. Indicate the directional effect of an interest rate change or volatility change on options prices. Illustrate how put/call parity is established D.3 Determine the general shape of the graph of the strategies of buying and selling call and puts, and indicate the market outlook of investors using these strategies. D.4 To acknowledge and apply the main models of option pricing. To acknowledge the main limitations of such models. D.5. To acknowledge and explain the Greeks. Explain the delta of an option and demonstrates how it is used in dynamic hedging. Explain the gamma effect on an options price and how gamma can affect a delta hedging D.6 Demonstrate methods for estimating the future volatility of the underlying asset D.7 To acknowledge and explain the main kinds of exotic options. E. Final topics E.1 Understand why derivatives can create losses. How to avoid pitfalls in risk management E.2 Know the recent developments in the derivative industry. Explain products that have been created to manage weather, energy price and insurance risks. E.3 Understand the role of commodity derivatives in portfolio management. E.4 Know the recent developments of derivatives exchanges. E.5 Understand the Basel II accord. What are credit derivatives. Explain the advantages of using credit derivatives over other credit instruments. Explain the use of credit derivatives by the various market participants.
Program
1. Financial Markets. 1.1 Types of financial risk 1.2 The role of derivative markets
2. Futures Markets 2.1 Basic characteristics of futures contracts. 2.2 The mechanics and organisation of futures markets. 2.3 Identification of the main international derivatives markets. Identification of the main futures contracts. 2.4 Stock index futures and currencies futures 2.5 Pricing and Arbitrage 2.5.1 Factors determining contract price 2.5.2 Pricing: The Carry Cost Model 2.5.3 Arbitrage and the no ?arbitrage boundaries. 2.5.4. Basis and Basis Risk 2.6. Risk management strategies with futures: hedging and speculation. 2.6.1 Speculation 2.6.2 Hedging strategies 2.6.2.1 The hedge ratio 2.6.2.2 The perfect hedge 2.6.2.3 Minimum variance hedge ratio 2.6.2.4 Hedging and portfolio management with stock index futures
3. Forward Contracts 3.1 Basic characteristics of a forward contract 3.2 Default risk of a forward contract 3.3 Distinguishing between futures and forward contracts
4. Options Markets 4.1 Basic Concepts; Long and Short Positions and Payoffs; The mechanics and organisation of options market. 4.2 Options Premium: Intrinsic and Time Value. Determinants of options prices. Price Boundaries. Put call parity 4.3 Options strategies 4.4 Models of Option Pricing: The binomial Model, The BlackScholes Model, the dividend effect and the Merton Model, Options on currencies 4.5 The Greeks: Price of underlying asset and delta and gamma, The time to maturity and theta Interest rate and rho, Volatility of stock returns and vega, 4.6 Volatility and related topics 4.6.1 Estimating volatility from historical data 4.6.2 Implied volatility and volatility smile 4.7 Exotic options
5. Final Topics with derivatives 5.1 Problems with misusage of derivatives 5.1.1 Barings Case 5.1.2 Societé Generale 5.2 Alternative assets and Other Derivatives 5.2.1 Weather derivatives 5.2.2 Insurance Derivatives 5.2.3 Energy derivatives 5.2.4 Commodity derivatives. The role of financial commodity advisers 5.3 Derivatives Exchanges: recent developments 5.4 Basel II and Credit Risk Derivatives
Evaluation Method
The assessment includes:
I. Midterm test (weight 30%). Chapters I, II and III. II. Participation in class (weight 5%). This requires the attendance to classes as well as solving exercises, home works, participation in class discussion among other activities. III. Work Group (weight 25%). On the topics of Chapter V. The grade includes the written report, class presentation and bibliography IV. Final exam (weight 40%).
This global grading system requires a rate of attendance to classes of at least 80%; otherwise the student will fail and to get approval in the unit it will apply to the 2nd chance final exam.
The students that, in this learning unit, have a final grade equal or above 17 points will have to do an oral examination, in order to defend the grade obtained. If the student does not show up at that oral examination, her/his grade will be 16 points.
Teaching Method
During the learning term, the student must acquire and develop cognitive, analysis and synthesis, research, critical and selfcritical, communication and relationship competences, in the scope of this learning unit and in compliance with the objectives, defined above.
For the acquisition of these competences will be used, in the contact hours of this learning unit, a range of teaching methods (e.g., theoretical expositions; cases? analysis and debate; problem solving techniques and instruments; etc.) that, in an articulated manner, allow the mastering of the above competences.
Observations
Basic Bibliographic
 Textos de Apoio teórico/práticos a facultar pela equipa docente durante o semestre;  Bodie and Merton ? Finance (Prentice Hall, 2003), leitura recomendada sobre os princípios gerais da gestão do risco  Brealey e Myers (2005) ?Principles of Corporate Finance?, McGraw Hill, 7th Edition,  ver capítulos sobre opções.  J. Hull ? Fundamentals of Futures and Options Markets (Prentice Hall, 2007),6 th Edition ? cobre todo o programa da disciplina;  J. Hull  Options, Futures and Other Derivatives (Prentice Hall, 2006) ? texto para aprofundar todos os pontos da matéria;  J. P. Peixoto (1995) ?Futuros e Opções?, McGraw Hill  leitura recomendada para acompanhamento do programa;  Kolb  ?Futures, Options & Swaps?, Blackwell Publishing, 7th Edition (2007) leitura recomendada para acompanhamento do programa;.  R. Stulz  ?Risk Management & Derivatives? (2003), Thomson SouthWestern  cobre todo o programa, dando especial relevância à gestão do risco financeiro.
Complementar Bibliographic
 Jornais diários e/ou semanários com temáticas de economia, finanças e gestão (v.g. Diário Económico; suplementos de economia de jornais diários, etc);