ICM211: Derivative Securities: Pricing, Hedging and Trading

Module code: ICM211

Module provider: ICMA Centre; Henley Business School

Credits: 20

Level: 7

When you'll be taught: Semester 2

Module convenor: Dr Mike Smith, email: m.j.smith@icmacentre.ac.uk

Pre-requisite module(s):

Co-requisite module(s):

Pre-requisite or Co-requisite module(s):

Module(s) excluded:

Placement information: NA

Academic year: 2024/5

Available to visiting students: No

Talis reading list: Yes

Last updated: 19 November 2024

Overview

Module aims and purpose

This is a very practical course focusing mainly on option/volatility trading and risk management. The seminars all take place in the dealing room, and students will manage the risk, as market makers, of equity options portfolios on ICTrader. The course is designed to give students a basic practical working knowledge of the pricing and trading of derivative securities, and in particular options. Most textbooks on the subject are either too mathematical/theoretical or too practitioner oriented, and this module attempts to bridge the gap between the two. By the end of the course students should be able to “speak the language” of the derivatives market whilst at the same time have an intuitive grasp of the subject. Whilst option theory is of obvious importance, the emphasis of this course is on practical application – in particular, we will look at the time/risk dynamics of options in a trading environment. The derivatives industry impacts on all sectors of investment banking, and whether or not students choose a career in derivatives trading/sales/research, they will find this course extremely useful. The overriding philosophy of the course is: “learning by doing”.

Module learning outcomes

By the end of the module, it is expected that students should be able to: 

• Identify the fundamental risk exposures associated with any options portfolio and critically evaluate the option risk sensitivities- Delta, Gamma Theta, Vega, Rho – as well as how to manage the Greek exposures in a dynamic live risk environment 
• Define the different option volatilities-and critically evaluate all the standard option volatility spread strategies.  
• Critically evaluate and be able to implement option hedging strategies in the face of changing market conditions 
• Define the necessary skills needed to be an options market maker and utilise the Chicago Mercantile Exchange Option Strategy Guide

Module content

- Review of Option Basics: plain vanilla calls and puts, synthetic futures, option moneyness, intrinsic value, time value, option exposure 

- The Greeks: option price sensitivities (Risks and Trading Applications)-Delta, Theta, Gamma, Vega, Rho 

- Managing long/short Gamma (Gamma scalping), long/short Vega, long/short Theta, Delta long, Delta short, Delta neutral 

- Volatility: trading actual and implied volatility 

- Volatility Spreads: straddles, strangles, long/short butterflies, call and put ratio vertical spreads, call and put ratio backspreads, Bullish/bearish vertical spreads, time (calendar) spreads, condors 

- Trading Strategies-basic financial engineering using the Chicago Mercantile Exchange Strategy guide. 

- Managing equity option portfolio risk as market makers on ICTrader 

- Basic option pricing principles 

- Introduction to exotic options 

Structure

Teaching and learning methods

Core lectures supported by Excel based option/volatility spread analysis/case studies, and equity option trading seminars using the option trading simulation ICTrader.

Study hours

At least 40 hours of scheduled teaching and learning activities will be delivered in person, with the remaining hours for scheduled and self-scheduled teaching and learning activities delivered either in person or online. You will receive further details about how these hours will be delivered before the start of the module.

Please note the independent study hours above are notional numbers of hours; each student will approach studying in different ways. We would advise you to reflect on your learning and the number of hours you are allocating to these tasks.

Semester 1 The hours in this column may include hours during the Christmas holiday period.

Semester 2 The hours in this column may include hours during the Easter holiday period.

Summer The hours in this column will take place during the summer holidays and may be at the start and/or end of the module.

Assessment

Requirements for a pass

50% weighted average mark

Summative assessment

Penalties for late submission of summative assessment

The Support Centres will apply the following penalties for work submitted late:

Assessments with numerical marks

• where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of three working days;
• the mark awarded due to the imposition of the penalty shall not fall below the threshold pass mark, namely 40% in the case of modules at Levels 4-6 (i.e. undergraduate modules for Parts 1-3) and 50% in the case of Level 7 modules offered as part of an Integrated Masters or taught postgraduate degree programme;
• where the piece of work is awarded a mark below the threshold pass mark prior to any penalty being imposed, and is submitted up to three working days after the original deadline (or any formally agreed extension to the deadline), no penalty shall be imposed;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

Assessments marked Pass/Fail

• where the piece of work is submitted within three working days of the deadline (or any formally agreed extension of the deadline): no penalty will be applied;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension of the deadline): a grade of Fail will be awarded.

The University policy statement on penalties for late submission can be found at: /cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmission.pdf

You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Formative assessment

Formative assessment is any task or activity which creates feedback (or feedforward) for you about your learning, but which does not contribute towards your overall module mark.

Reassessment

Additional costs