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Derivatives and Alternative Investments

Module description

This module is intended for Financial Services Degree Apprenticeship students who are looking to develop a sound knowledge in managing financial risk, exploiting investment opportunities and creating synthetic asset class exposure. The module introduces the basic principles of derivative pricing and the concept of arbitrage. Students should be able to demonstrate a working knowledge of the analysis of derivatives, including forwards, futures, options and swap. An overview of the widely used alternative investments, including hedge funds, private equity, real estate, commodities and infrastructure investment is examined with emphasis on their distinguishing characteristics, considerations for valuation, and potential benefits and risks. Similarities and differences with traditional investment – stocks and bonds - are also considered.

Module aims - intentions of the module

This module builds the conceptual framework for understanding the basic derivatives and derivative markets. Essential features and valuation concepts for forward commitments, such as forwards, futures and swaps and contingent claims such as options are introduced. The purpose is to establish the foundations of derivative pricing on a basic conceptual level. The following topics are covered:

• How does the pricing of the underlying asset affect the pricing of derivatives?
• How are derivatives priced using the principle of arbitrage?
• How are the prices and values of forward contracts determined?
• How are future contracts priced differently form forward contracts?
• How are the prices and values of swaps determined?
• How are the prices and values of European options determined?
• How does American option pricing differ from European option pricing?

The module also introduces the basic characteristics and categories of alternative investments; general strategies of alternative investment portfolio managers; the role of alternative investments in a diversified portfolio; and investment structures used to provide access to alternative investments. You will be able to describe features of hedge funds, private equity, real estate, commodities, infrastructure, respectively, along with issues in calculating returns to and valuation of each. Other alternative investments and an overview of risk management, including potential benefits and risks, fee structures and due diligence of alternative investments, are presented.

Intended Learning Outcomes (ILOs)

ILO: Module-specific skills

On successfully completing the module you will be able to...

• 1. Describe purposes of, and controversies related to, derivative markets
• 2. Explain arbitrage and the role it plays in determining prices and promoting market efficiency
• 3. Define forward contracts, futures contracts, options, swaps and credit derivatives and compare their basic characteristics
• 4. Explain how the concepts of arbitrage, replication and risk neutrality are used in pricing derivatives
• 5. Compare alternative investments with traditional investments
• 6. Describe issues in valuing and calculating returns on hedge funds, private equity, real estate, commodities and infrastructure
• 7. Evaluate risk management of alternative investments

ILO: Discipline-specific skills

On successfully completing the module you will be able to...

• 8. Identify potential benefits of alternative investments in the context of portfolio management
• 9. Recognise the practice of risk management as a dynamic and ongoing process
• 10. Apply trading and risk management tools under supervision in real-world context

ILO: Personal and key skills

On successfully completing the module you will be able to...

• 11. Understand the impact the external environment has on Financial Services as appropriate to their role, together with relevant best practice.
• 12. Demonstrate a sound understanding of the relevant Financial Service products and services offered to clients/customers by their organisation
• 13. Deliver technical advice to clients/customers and implement product solutions

Syllabus plan

• Derivative Markets and Instruments
• Fundamental Concepts of Derivative Pricing
• Pricing and Valuation of Forward Commitments
• Pricing and Valuation of Options
• Alternative Investments: Hedge Funds, Private Equity, Real Estate, Commodities, Infrastructure
• Risk Management Overview

Learning activities and teaching methods (given in hours of study time)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

Indicative learning resources - Basic reading

• Derivatives and Alternative Investments, CFA® Program Curriculum Level I Volume 6, CFA Institute.
• Hull, J.C. (2018), Options, Futures, and Other Derivatives , 10th ed., Pearson.

Key words search

Derivatives, Alternative Investments