Derivative Securities

Subject FNCE30007 (2014)

Note: This is an archived Handbook entry from 2014.

Credit Points: 12.50
Level: 3 (Undergraduate)
Dates & Locations:

This subject has the following teaching availabilities in 2014:

Semester 1, Parkville - Taught on campus.
Pre-teaching Period Start not applicable
Teaching Period not applicable
Assessment Period End not applicable
Last date to Self-Enrol not applicable
Census Date not applicable
Last date to Withdraw without fail not applicable

Timetable can be viewed here. For information about these dates, click here.
Time Commitment: Contact Hours: Two 1-hour lectures and a 1-hour tutorial per week
Total Time Commitment: Not available

FNCE20001 Business Finance and one of ECOM20001 Introductory Econometrics, ECON20003 Quantitative Methods 2, MAST20005 Statistics, 620-270 Applied Statistics, MAST20004 Probability, MAST20006 Probability for Statistics, 620-261 Introduction to Operations Research (2008 or earlier), MAST20018 Discrete Maths and Operations Research or MAST20029 Engineering Mathematics.



Recommended Background Knowledge:

Please refer to Prerequisites and Corequisites.

Non Allowed Subjects:


Core Participation Requirements:

For the purposes of considering requests for Reasonable Adjustments under the Disability Standards for Education (Cwth 2005), and Students Experiencing Academic Disadvantage Policy, academic requirements for this subject are articulated in the Subject Description, Subject Objectives, Generic Skills and Assessment Requirements for this entry.

The University is dedicated to provide support to those with special requirements. Further details on the disability support scheme can be found at the Disability Liaison Unit website:


Dr Jonathan Dark


Semester 1:

Semester 2:

Subject Overview:

This subject focuses on the application and valuation of derivative securities, such as forwards, futures, swaps and options. The emphasis will be on arbitrage relations, valuation, and hedging with derivatives. The topics covered include; Forwards and futures: the mechanics of trading, price determination, hedging strategies; Swaps: definition and valuation; Options: payoffs, arbitrage bounds, trading strategies, the binomial model, the Black-Scholes model and its relationship to the binomial, hedging, American options and dividends, options on futures, limitations of the binomial and Black-Scholes Models.

Learning Outcomes:

On successful completion of this subject students should be able to:

  • Explain the role of derivatives exchanges and the characteristics of derivative securities;
  • Explain the role of arbitrage as a basis for determining the prices of derivative securities;
  • Explain the mechanics of trading futures contracts, forward contracts and options;
  • Design and manipulate payoff diagrams for various derivative securities;
  • Calculate option prices using the Black-Scholes and binomial models;
  • Explain how derivative securities can be used in hedging;
  • Reflect on the theoretical limitations of key derivatives pricing models and on practical difficulties that arise in their implementation.
  • 3-hour end-of-semester examination (75%)
  • A mid-semester examination between weeks 6 – 8 (25%)
Prescribed Texts:

You will be advised of prescribed texts by your lecturer.

Breadth Options:

This subject potentially can be taken as a breadth subject component for the following courses:

You should visit learn more about breadth subjects and read the breadth requirements for your degree, and should discuss your choice with your student adviser, before deciding on your subjects.

Fees Information: Subject EFTSL, Level, Discipline & Census Date
Generic Skills:
  • High level of development: problem solving; statistical reasoning; application of theory to practice; synthesis of data and other information; evaluation of data and other information.

  • Moderate level of development: written communication; interpretation and analysis; critical thinking; use of computer software.

  • Some level of development: oral communication; collaborative learning; team work; accessing data and other information from a range of sources.

Related Breadth Track(s): Economics &&& Finance

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