To pass this unit (requires a Standardised Numerical Grade of 50 or better) the student must pass the final examination.

CLASSES

Face-to-Face Teaching: Generally 20 hours

Timetable: Detailed timetable for classes are on the Centre’s web site www.mafc.mq.edu.au

Consultation Times: 

Students who wish to contact any of the teaching staff may do so through:

• The Unit’s iLearn site, in relation to general queries (so that all students may benefit); or 
• Individual consultation with the lecturer by email in the first instance, if necessary.

REQUIRED AND RECOMMENDED TEXTS AND/OR MATERIALS

Text: Readings include sections from Robert L. McDonald, Derivatives Markets (3^rd edition).  Pearson Education/Prentice Hall, 2013. A lower cost version is available, Pearson New International Edition: ISBN 9781292021256. Students should already have this textbook from the Financial Instruments core unit.

Additional Readings: 

• Readings containing relevant articles are included in the unit notes.
• Readings that are specifically discussed in class are examinable.
• Additional readings are also given as reference material and for extension for interested students. These are not examinable. 

Lecture Notes: Available in printed form and electronically via iLearn. 

Pre-Unit Materials: Information papers on statistics, regression, accounting and other material may be found at http://www.mafc.mq.edu.au/applications/minimum-knowledge-requirement/pre-course-materials1/. Students should work through this material prior to commencing the degree.  The material will remain a useful reference as students progress through the program.

Useful References: 

• Espen Gaarder Haug, The Complete Guide to Option Pricing Formulas, 2^nd Edition, McGraw-Hill 2006. This contains Excel/VBA option pricing software, some of which is used in the exercises in class.
• Kerry Back, A Course in Derivative Securities, Introduction to Theory and Computation, Springer Finance 2005. Accompanying Excel spreadsheets can be downloaded from the author’s website: http://www.kerryback.net/
• John C. Hull, Options, Futures and Other Derivatives, 8^th Edition, Prentice-Hall 2012. 

​Calculators: In examinations, hand held calculators are not required nor permitted. Mobile phones and computers are not permitted. 

Assumed Knowledge: 

• You need to be comfortable with algebraic expressions and the basic concepts of calculus and probability.
• Workshops using Excel spreadsheets are done in class, to price exotic options using different methods and to study their behaviour as market conditions change. VBA macros are supplied and modified in class but you do not need previous experience with VBA. The assignment involves similar calculations and graphics in Excel.

Assumed Access:

• Access to a computer with word processing and MS Excel (with VBA) spreadsheet capability is assumed, as is general student computer literacy.
• Almost any version of MS Office on Windows or Mac will do. If you have a Mac, you will need to use Office 2004 or earlier, or Office 2011 (with Service Pack 1) or later. However the workshops and assignment cannot be done using Office 2008 for Mac since it does not have VBA.
• Workshops are done in class on laptop computers. If you have a laptop or access to one, it would be beneficial if you could bring it. It will need to have MS Excel installed. Students can work in pairs or small groups so that those without their own laptop still experience the exercises and take away a copy of the work done in class. In this case you need to arrange to work with another student and take a copy of the work that you have done together in class.

TECHNOLOGY USED AND REQUIRED

Unit iLearn Site: 

• Found by logging on to iLearn ilearn.mq.edu.au, then clicking on Exotic Options.
• This is where you will find forums, downloadable resources and links to important pages. 
• The forum allows you to communicate with other students and lecturer(s) and may provide supplementary material. 
• You are requested to post your questions on the forums at least 24 hours prior to the assignment submission date or the examination date. Questions posted after that time may not be answered. Do not leave your questions to the last few days. 

Important Notice: 

• It is important that you familiarize yourself with the Unit’s iLearn site. 
• Students should check the Unit’s iLearn site regularly (minimum twice a week and prior to all lectures) and look for updates and distribution of materials (including case studies) related to the unit or assessments and, if relevant, participate in forum discussions. 

INTRODUCTION TO OPTION PRICING

• Option pricing within a generalised Black-Scholes framework.
• The market implied volatility smile and why it exists.
• Overview of models which can explain the volatility smile.
• Common standard option combinations.

INTRODUCTION TO EXOTICS  

• Classification of exotic options.
• Digital options; pricing and hedging.
• Structured product examples: Range Accruals, TARNs

STRUCTURED PRODUCTS

• How structured notes are constructed.
• Structured note variations.
• Structured product example: Equity Linked Certificate of Deposit

REVIEW OF NUMERICAL METHODS  

• Overview of methods commonly used to price exotic options:
• Numerical integration; binomial tree models; finite difference methods; Monte-Carlo simulation.

DECISION OPTIONS

• American options; Bermudan options; Shout options.
• Tree pricing techniques for Decision options.

SECOND ORDER OPTIONS

• Compound options; Instalment options.

PATH-DEPENDENT OPTIONS

• Forward start options; Reset options; different varieties of cliquet options.
• Structured product example: Napoleon Cliquet

TWO ASSET OPTIONS

• Out-performance options; Spread options.
• Pricing issues, correlation risk and dispersion.

QUANTOS

• Varieties and uses.
• Pricing by finding the risk-neutral trend.
• Applications in foreign exchange markets.
• Structured product example: Autocallable Gold Note

AVERAGE OPTIONS

• Varieties and uses.
• Pricing using analytical approximation and simulation.
• Structured product example: HSBC ASX 200 Linked Investment

BASKET OPTIONS

• Definition and uses.
• Pricing using analytical approximation and simulation.
• Sensitivity to correlation, volatility and dispersion.
• Structured product examples: Mountain options.

BARRIER AND RELATED OPTIONS

• Varieties of Barrier, Lookback and Hindsight options.
• Structured product examples: Ladders, Smart Forwards, Faders, Onion Options.
• Barrier option dynamics and hedging.
• Pricing issues for continuously path-dependent options.

​

This Unit Guide may be subject to change. The latest version is on the Centre’s web site www.mafc.mq.edu.au.

Students should read the Unit Guide carefully at the start of semester.  It contains important information about the Unit.  If anything is unclear, please consult one of the unit lecturers.  

University Policy on Grading:

• Macquarie University’s Academic Senate has established a Grading Policy available at http://www.mq.edu.au/policy/docs/grading/policy.html. Your final result will include: 
  • A grade ranging from Fail to High Distinction; and
  • A Standardised Numerical Grade (SNG). A SNG is not a summation of the individual assessment components, but is allocated on the basis of the performance in all assessment items, providing the examination component is passed.
• It is important to note:
  • The Policy does not require that a minimum or maximum number of students are to be failed in any unit; 
  • Grades will not be allocated to fit a predetermined distribution; and
  • The process of allocating SNGs does not change the rank order of marks among students who pass the unit. 

Specific Unit Grading: 

•  To pass this unit (requires a Standardised Numerical Grade of 50 or better) the student must pass the final examination.
• All final grades in the Applied Finance Centre are determined by a grading committee and are not the sole responsibility of the unit convenor.
• The core criteria used to assess student work in this unit are: 
  • Knowledge and understanding: Understanding key ideas, knowledge and use of concepts.
  • Application: Ability to apply theoretical ideas and frameworks in practice and in a critically reflective way. 
  • Reasoning and analysis: Ability to analyse, use critical reasoning and principles to formulate a position, balancing theory and personal reflection. 
  • Professional literacy and research: Understanding of professional factors (language and landscape) and ability to undertake appropriate research. 
  • Communication and presentation: Ability to communicate and present effectively (written and oral, as relevant).
  • Use of mathematical and statistical ideas: Ability to use mathematical and statistical ideas, methods and formulae appropriately. 
• Performance in relation to each of these criteria are assessed against the University’s grading descriptors:

Review of Grade and final examination Script viewing:

• A student who has been awarded a final grade for a unit and who does not believe it is an accurate reflection of their performance, and has grounds for such a claim and can demonstrate those grounds, may apply to have their grade reviewed. 
• For information on requesting a review of grade and/or viewing your final exam script, please refer to the University’s Grade Appeal Policy at http://www.mq.edu.au/policy/docs/gradeappeal/policy.html and MAFC Program Rules & Procedures at http://www.mafc.mq.edu.au.