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Professor André FARBER
Solvay Brussels School of Economics and Management

Université Libre de Bruxelles

Blogs: finance@solvay & André Farber

GEST-S-502 DERIVATIVES
2012-2013

Announcements

January 27, 2013 Class will start Wednesday February 6 at 8 AM room R42.5.103
I start udpdating the Derivatives website. New files will be posted as the course proceeds.
February 18, 2013 Post files provided by Professor Pirotte
March 6, 2013 Post Case 1 (due Monday March 18)
March 9, 2013 Post Excel files used in class to illustrate hedging with futures (E42) and swaps (E52)
April 17, 2013 Post Slides Market Making and Delta Hedging + underlying Excel file
April 23, 2013 Post Case 2 (due Monday May 6)
May 16, 2013 Post solutions for case 1 and case 2
Q&
A session: Monday June 10 3PM-6PM Room R42-1-110
June 15, 2013 Grades (exam and final) - I will be available to answer questions WednesdayJune 19 10 AM-12 AM My office R42 Level 4
June 19, 2013 Post exam june 2013 & solution

Course outline 2013
Meet
John Hull
at his website

Class notes (to be updated)
Class note 1 - Session 1
Introduction
Case study: Gamma Airlines + Solution
DB Research OTC derivatives’ new market infrastructure

WSJ Futures prices p1 and p2
Class note 2 - Session 2
Pricing Forward and Futures
Slides Prof. Pirotte + Excel file + Reading

Case study: Silver Mining + PP Solution
Class note 3 – Session 3 + Hedging with futures
Case study: Texoil + PP Solution + Excel Solution
Class note 4 - Session 4 Interest Rate Derivatives
Additional class note - duration
Case study: Peoples’ Car + PP Solution

Class note 5 - Session 5 Swaps
Case study 1 2013 NEW 2013 + PPSolution + Excel file 1 + Excel file 2

Class note 6 - Session 6 Pricing options
Case study: BNPParibas + Solution
Class note 7 - Session 7 Inside Black Scholes
Case study: AluFrance + Solution
Class note 8 - Session 8 Greeks NEW 2011
Case study: under construction
Class note 8bis - Session 9 Market making and delta hedging NEW 2013 + Excel file
Class note 9 - Session 9 Using options
Strategies used by Madoff and Kerviel
Case study: Ask Agatha + Solution
Class note 10 – Session 9
Beyond Black Scholes
Classe note 10/1 Beyond Black Scholes: more on lognormal distribution
Class note 11 - Session 11 Options on bonds and interest rates
Class note 11/1: Options on bonds and interest rates (I)NEW 2012
Class note 11/2: Options on bonds and interest rates (II)
Case study 2 2013:+Excel file NEW 2013 + PPSolution + Excel file
Cases 2012 wrap up

Teaching notes:
IR Derivatives - Summary (pdf)
Futures on Government Bonds
Interest Rates Futures
Swap - Summary (pdf)
Binomial option pricing model (pdf)

Additional Short case studies
Comtrade
Forward contract
Société Automobile Belge
Interest Rate Futures
Orange County
Updated 2011
Belgofin
Interest Rate Swap
Microswiss
Currency Swap
Belcom, pension fund
- lognormal property of stock prices

Questions and Problems
Practice is the only way to master the derivative beasts. Below are some suggestions of useful Q&P in Hull (6th ed). Work them out before looking at the solution.
Hull 6th ed Selected solutions
Hull 7th ed Selected solutions
Hull 8th ed Selected solution

Here are the formulas that I will join to the final exam.
Old exam questions in English with short answer
Past exams + Solutions (up to 1999)
Examen Janvier 2001
+ Solution
Exam January 2000
+ Solution
Exam January 2002
+ Solution
Exam January 2003 + Solution
Exam January 2004 + Solution
Exam January 2005 + Solution
Exam January 2006 + Solution
Exam January 2007 + Solution
Exam January 2008 + Solution
Exam January 2009 + Solution
Exam January 2010 + Solution
Exam May 2011 + Solution
Exam June 2012 + Solution
Exam June 2013 + Solution

Excel Files used in class (Exx) + some older files
Futures
Illustrations of futures price calculations
E21 Fwd Price vs Expected spot price NEW 2012
E22 Fwd Rate vs Expected spot rate NEW 2012
E30 Fwd on Zero Coupon - Review NEW 2012
E31 Index Futures Simulation NEW 2012
E40 Government Bond Futures Valuation : To understand FGBL futures
E41 Duration hedge
E42 Hedging with futures NEW 2013
E50 Interest Rate Swap
Illustration
E51 Currency Swap
Illustration
E52 Swaps
NEW 2013
Geometric Brownian motion
- Illustration
E60 Binomial representation of GBM
NEW 2012
E61 RN pricing and CAPM
NEW 2012
E62 Binomial 3-period
NEW 2012
E70 Lognormal distribution
NEW 2012
E71 Black Scholes in Excel
Option strategies 

E81 Delta and Gamma Hedging NEW 2012
E82 Portfolio insurance NEW 2012
E101 IROPT Ho & Lee (I)
E102 IROPT Ho & Lee (II)
E103 IROPT BDT
Barrier options valuation in Excel
E111 Exotic option: binomial presentation 
E112 Exotic option: binomial Monte Carlo 
Options on bonds and interest rates

Additional readings
(to download from various Web sites)
Risk Management Lessons from LTCM - P. Jorion

Last update : Juin 19, 2013