FINANCE 357 Spring 2001

Equity and Commodity: Options and Futures


Room 347, Wednesday night, 6:30 -9:10 pm.

Prof. GUDIKUNST, e-mail:

OFFICE: SUITE G, Room 464, Tel. Ext. 6387

Office Hours: Tues., Wed., Thurs. 2:30-5:00 pm Other times by appointment.


The purpose of this course is to explore and develop a deeper understanding of options, futures and other derivative securities. These contracts are derived from the marketable securities (i.e. stocks) and commodities that underlie the options and futures contracts. The pricing of the options and futures instruments is dependent on the price of the underlying security, and hence they may be referred to as "derivative" securities. The term "speculative" securities is used to refer to options and futures because of the characteristic that these securities have an inherently high degree of financial leverage, which can lead to extremely high returns, but with significant probabilities of total loss of investment capital.

Options and futures can be used by price speculators to capitalize on short term price movements in the underlying assets. However, speculators are not the only participants in the marketplace. These "speculative" or "derivative" securities are also employed by other participants to hedge away price risks, or to obtain profits from the use of arbitrage trading.

The joint actions of speculators, hedgers and arbitrageurs provide the trading activity in the marketplace. But what determines the "correct" level of prices for these instruments? The pricing of the securities will be explored from an economic framework and the important models actually used in security analysis will be presented.

The final focus of the course will be on the application of options and futures contracts in financial management and investment management. Financial managers may desire to reduce price risks in their operations relating to currency and raw material inventory holdings, and can use the speculative securities to reduce market risks in new security floatation. Investment managers may employ options to reduce individual security price risk, or total portfolio risks, whether they are dealing with equity or debt securities. Futures and options contracts may also be used by portfolio managers to implement market timing strategies.

This course will explore the trading and operations of the speculative securities markets, the pricing models for securities, and the applications of options and futures by both financial managers and investment managers.



AN INTRODUCTION TO DERIVATIVES, Fourth Edition (noted as Text)

by Don M. Chance Dryden Press 1998

Other texts for reference available in library:

1. Figlewski, Stephen, Hedging with Financial Futures for Institutional Investors, Ballinger, 1986.

2. The Options Institute, Options: Essential Concepts and Trading Strategies, IRWIN Professional Publishing

3. Babcock, Bruce, The Dow Jones-Irwin Guide to Trading Systems, Dow Jones-Irwin

4. Schwager, Jack, A Complete Guide to the Futures Markets, John Wiley & Sons, 1984.

5. Schwager, Jack, Schwager on Futures, Fundamental Analysis, John Wiley & Sons, 1994

Dr. G's Course Rules:

Rule 1: Class Attendance

Class attendance will not be used directly in grading. However, class participation will be graded.

Rule 2: Quizzes

The instructor reserves the right to give in-class quizzes on an unannounced or announced basis.

Rule 3: Reading Assignments

You are responsible for reading the indicated text chapters and other readings before the class discussions.

Rule 4: Assigned Homework/Study Problems and Trading Simulation

Assigned problems should be prepared for submission as required by instructor. Keep a comprehensive notebook on the problem solutions for grading and test study purposes. Problems are due after class discussion of material. Instructions for Trading Simulation will be given separately.

Rule 5: Examinations

There will be two mid-term examinations during the semester, as indicated on syllabus. You will be allowed one standard size sheet of notes for each in-class exam, plus a calculator. There may also be out-of-class exam portions, for which computers may be useful. There will be a final exam given during the assigned exam period. This final will cover the material over the entire content of the course.

Rule 6: Term Project (article review)

Each student shall prepare a review based on material from a professional journal, dealing with a topic of applications of options or futures by investment or corporate finance managers, or the development and history of a new derivative product. Topic Proposal Due March 28, 2001.


Homework Assignments 15%

Quizzes/Participation 10%

Trading Simulation 10%

Term Project 20%

Mid-term Examinations (2) 30%

Final Examination 15%






F 357 Course Outline

Week of:

Topic/Text Readings

Problem Assignments

Jan. 24 and Jan. 31

Introduction to Options and Futures

Reading: Text Ch. 1, 2 and 7

Ch. 2 ( 4,10,13,16, App2B 1,2)

Ch. 7 ( 4,16,17)

Feb. 7

Speculation in Derivative Securities

Readings: library readings, notes

To be assigned

Feb. 14

More on Technical Analysis and Speculation

Readings: library readings, notes

To be assigned

Feb. 21

Binomial Options Pricing Model

Reading: Text Ch. 3 and 4

Ch. 3 (12, 14-19)

Ch. 4 (10,11)

Feb. 28

Black-Scholes Options Model

Reading: Text Ch. 4

Ch. 4 (12,13,14,15,16,17)

Mar. 7

Options Trading Strategies

Reading Text Ch. 5 and 6

Ch. 5 (13,14,15,16,17,18)

Ch. 6 (9,11,12,15,17)

Mar. 14

SPRING BREAK- no class


Mar. 21

Forwards and Futures: Markets and Trading

Reading: Text Ch. 7

Ch. 7 (4,17,21,22, App B 1,2)

Mar. 28

Principles of Forward and Futures Pricing

Reading: Text Ch. 9

Ch. 9 ( 3,4,12,13,14, 17)


Hedging Strategies Using Futures

Reading: Text Ch. 10

Ch. 10 ( 11,12,17,18,19)

Apr. 11

Stock Index Futures: Arbitrage and Market Timing

Reading: Text Ch. 11 (pp 414-426)

Ch. 11 ( 12,13,14,17,19)

Apr. 18

Equity Portfolio Insurance Strategies

Reading Text Ch. 15

Ch. 15 (8,9,15)

Apr. 25

Foreign Currency Derivatives and Applications

Reading: Text Ch. 13

Ch. 13 (3,6,9,11,12,13)

May 2

Options on Futures Contracts

Reading: Text Ch. 12

Final Projects Due to Prof.

Ch. 12 (1,4,12-15)

May 9

(6:30 pm)

Final Examination

WEB sites to visit during semester: Microsoft Investor-general portfolio tracking and stock analysis Wall Street Research Network-entry point for options and futures

(visit also,, )

Bridge Data System in Library has general market information and technical analysis systems for use in common stock investing.