MGFC30H3 Study Guide - Fall 2018, Comprehensive Midterm Notes - Simulation, William Kennedy Dickson, William James
MGFC30H3
MIDTERM EXAM
STUDY GUIDE
Fall 2018
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Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada
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MGFC30H -- Introduction to Derivatives Markets
Instructor: Prof. Jason Z. Wei
Sept. – Dec., 2018
Office: IC 372
L01: WE 12-2pm, IC 208
Office hrs: MO 3-4:30pm, WE 5-6pm
L02: WE 3-5pm, IC204
Phone: 416-287-7332
Email: [email protected]
COURSE DESCRIPTIONS
Derivatives, as a class of financial securities, have become an integral part of modern
finance. Nowadays, introductory and intermediate-level courses on futures and options are
standard offerings in most business schools. Meantime, the demand for finance professionals
with a sound understanding of derivative products and markets has been increasing, especially on
Wall Street and Bay Street. Financial institutions (e.g., banks) and institutional investors (e.g.,
pension funds) regularly deal with the trading, valuation, and accounting of derivative securities.
The co-op terms of many UTSC BBA students involve duties related to derivatives, especially
for the placements with banks, CPPIB and Ontario Teachers’ Pension Plan.
This course covers the fundamentals of futures and options, with four main objectives.
First, it introduces students to the basic valuation models such as the cost-of-carry model and the
Black-Scholes model. Just as the discount cash flow framework allows us to value bonds and
stocks (by discounting coupons and dividends), the basic valuation models introduced in this
course allow us to arrive at an intrinsic value for a derivative security. Second, we demonstrate
how derivative securities can be used to enrich investment strategies and enhance risk
management (e.g., portfolio insurance). Third, the course exposes students to the most recent
developments in the derivatives market, and identifies trends that will likely shape the future of
the derivatives industry. Fourth, the course enlightens students with the practical aspect of the
derivatives markets. Through real-time trading of derivative securities via the Rotman Portfolio
Manager (RPM), students will be able to apply their classroom knowledge to real-world investing.
By the end of the course, students will have mastered the basic knowledge and skills necessary to
pursue an entry level career in the derivatives industry or pursue advanced studies of the subject.
The co-requisite is MGFC10 (Intermediate Finance) and hence the prerequisites are
identical to those of MGFC10. Those who have taken RSM435H (Futures and Options Markets)
on St. George Campus or MGT438H from UTM are not allowed to take this course.
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REQUIRED TEXTBOOK:
Fundamentals of Futures and Options Markets, 9th Edition, by John Hull (Pearson, 2017). ISBN-
10: 0-13-408324-5, or ISBN-13: 978-0-13-408324-7.
PERFORMANCE EVALUATION:
Attendance: 3%
Assignments (3): 12%
Simulation: 10%
Report: 6%
Portfolio: 4%
Bonus: 2%
Mid-term exam: 25% (Date: Oct. 24 - Temporary)
Final exam: 50%
The following notes apply to the above evaluation scheme. First, no late assignments will
be accepted for marking since the solutions are posted right after the deadline.
Second, although only three assignments are to be handed in for marking, one extra
assignment will be given for practice. Only Assignments 1, 3 and 4 are for marking. Assignment
2 is for practice only. Students do not have the option of handing in any three of the four
assignments. You must hand in Assignments 1, 3 and 4.
Third, for those who fail to write the midterm exam, the midterm weight (25%) will be
added to the final exam (75% in total). There will be no makeup midterm exam.
Fourth, to encourage continuous efforts and to reward significant improvement in
performance throughout the course, the midterm exam weight will be partially shifted to the final
exam should the final exam turn out to be better than the midterm. The bigger the improvement,
the larger the amount of shift in weight. If the percentage improvement is larger than 30%, then
all the midterm weight of 25% will be shifted to the final. Specifically, let “m” and “f” stand for
the midterm and final marks respectively in percentage and suppose f > m. Then the amount of
shift = [min(f – m, 0.30)/0.30]3/2 × 25%. For instance, if the final is 82% and the midterm is 61%,
then the shift is [0.21/0.30]3/2 × 25% = 14.64%. In this case, the midterm is worth 10.36% and the
final is worth 64.64%. To continue the example, if the final is 86% or higher, then the entire
midterm weight is shifted to the final.
Finally, the purpose of assigning 3% of the course weight to attendance is to discourage
students from skipping classes. Past experiences indicate time and again that the consequence of
missing classes is far more detrimental than students would like to believe. Barring unforeseen,
extraordinary events, students should attend each and every lecture. Attendance will be taken at
least three times throughout the term, with dates to be randomized. Each absence will result in a
loss of 1%, and the total penalty will be capped at 3%. For instance, if attendance is taken four
times in the term, and a student is absent at each attendance check, then he/she will lose 3%. On
the other hand, if attendance is taken five times, and a student is present at the first three
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