FINANCIAL DERIVATIVES I A78 – 410 Cevat Ertuna, Ph.D.

1. FINANCIAL DERIVATIVES IA78 – 410Cevat Ertuna, Ph.D.

2. Useful Information Cevat Ertuna, Ph.D. Room:60 711CPhone: x8761 • Office Hours: Mo. 9:20-12:10 Tu. 13:30-16:20 Th. 9:20-12:10 Dr. C. Ertuna

3. The Required Textbook Fundamentals of DERIVATIVES MARKETS McDonald Prentice Hall Dr. C. Ertuna

4. Description • This course is a general introduction to the derivative products, the derivative markets, and the application of the derivative instruments. • This course will cover futures, forwards, swaps, and put and call options, their uses and valuation, with the underlying assets such as equities, commodities, interest rates and currencies. Dr. C. Ertuna

5. Prerequisite Skills In order to pursue this course successfully, the student should already taken the course of • Financial Management – I • Algebra Dr. C. Ertuna

6. Objective The purpose of this course is to • Give students a working knowledge of derivative markets, • Familiarize students with derivative market instruments namely Future and Forward contracts, European and American options, • Develop an understanding of how to use derivative securities to minimize risk, • Provide knowledge about pricing and valuation of various derivative instruments. • The course will use extensively Excel. Dr. C. Ertuna

7. Objective (DMR-1) (Cont.) • To help you develop written and oral communication skills. All top-level executives insist that communication skills are absolutely critical to success in business. Knowledge of derivative instruments is useless unless you can effectively communicate your ideas and strategies to others. Dr. C. Ertuna

8. Learning Outcome After the course, the participants should be able to: • Describe the elements that comprise the derivative markets; • Explain the characteristics of the various types of derivative products; • Calculate the fair value prices of the derivative instruments; • Make financially sound decisions. Dr. C. Ertuna

9. Methodology The mode of instruction is ‘active learning’. That means that the responsibility of learning is on learners. • You Prepare for the Chapter; You, as learner, take the responsibility of learning • Brief Overview of the Chapter by the Instructor; to assist you with synapses necessary to make a sound overall picture • Class Exercises & Discussions; to enhance your decision making and communication skills, • Reviews and Quizzes; to give you feedback*, and • Exams (mid-term and final), Assignments, and Presentation; to assess your competence. Dr. C. Ertuna

10. Course Schedule (1/2) Dr. C. Ertuna

11. Course Schedule (2/2) Dr. C. Ertuna

12. Participation Points Positive Participation points: • The instructor will ask questions from end of the chapter (or a questions that are very similar to end-of-the-chapter questions). If a student can answer a question by working alone (notes and books are allowed for assistance) he or she will earn one participation point that will be directly added to his/her course score. Negative participation points: • Disruptive behavior such as eating, drinking or sleeping in the class, ringing cell phones, talking over the phone, being loud, late attendance over five minutes, etc. may constitute basis for negative points. Over all, students can earn up to +20 to -20 participation points. Dr. C. Ertuna

13. Remainders Remainders before Negative participation points: • There will be three remainders to students who exhibit any disruptive behavior such as keeping cell phones turned-on, being loud, late attendance over five minutes, eating, drinking or sleeping in the class etc. • If a student insists on disruptive behavior after three remainders, instructor will assign negative participation points. Dr. C. Ertuna

14. Grading The class participation points are opportunities provided to the students to improve their grades. Dr. C. Ertuna

15. E-Mail & Blackboard Accounts For this class, all students are required to have and maintain an active I-Shou undergraduate e-mail account and Blackboard account Blackboard will be the primary out-off-the-class communication platform. Announcements and class related questions should be posted to the Blackboard. Dr. C. Ertuna

16. E-Mail Address If you need to correspond with the instructor on a private matter, then please send your e-mail to the address below: certuna@isu.edu.tr Please note, however, that if your plea is related to the course including any request related to an increase in your course grade, then that will be posted to the Blackboard by the instructor. Dr. C. Ertuna

17. Courtesy You are expected to show courtesy to the class as a whole and to your classmates individually. That includes (but not limited to) acting towards and addressing to everyone in a dignifying manner, paying attention to the lectureand class discussions(no sleeping, no eating or drinking during the lecture), and coming to the class on time. Dr. C. Ertuna

18. Attendance Policy Attendance is required. • No-Attendance Policy: • University`s no-attendance policy will be strictly applied. • Late-Attendance Policy: • If you are late up to 5 minutes, you have to wait until 25 minutes after the hour and than enter the class. There will be no points deduction. • If you are late more than 5 but less than 25 minutes and wish to attend the class then following participation point deduction schema will be applied: Dr. C. Ertuna

19. Time For any and all purposes (be it for late attendence or for class and exam starting and endingpurposes) Time and date.com’s World clock http://www.timeanddate.com/worldclock/city.html?n=19 will be used Dr. C. Ertuna

20. On the Final Grade This instructor tries his best to give his students as much opportunities as possible to improve their grades. However, he does not adjust grades on a subjective basis and ISU University considers the passing grade as 60.00 Dr. C. Ertuna

21. What Do I Expect from You? What I expect from you is to improve your higher level thinking skills, along with the knowledge in the subject matter. In essence, the subject matters such as Management or Finance etc. are vehicles in the quest of improving higher level thinking skills. So, knowledge in a subject matter is required but not sufficient and in itself cannot help you to make sound decisions. For example, knowing the definition of planning is not sufficient to earn points in Management. You should be able to apply this knowledge to a particular problem and make a sound decision to earn the points. Dr. C. Ertuna

22. What Do I Expect from You? What is expected from you is a) to develop higher order thinking skills; • to organize information, • to analyze the situation, • to integrate information and knowledge, • to apply your knowledge to the situation, • to generalize if necessary, and • to evaluate the findings, b) make decisions which are sound and logical and c) support your decision with evidence. Dr. C. Ertuna

23. Lower Order Thinking Skills Are expected being mastered by the students at high school level Dr. C. Ertuna

24. Knowledge When content is new, learners must be guided in relating the new knowledge to what they already know, organizing and then using that new knowledge. Knowledge can be of two types: Declarative(i.e., attributes, rules) or Procedural (skills and processes). Items of this type are factual and content-specific.  Most tasks require that learners recognize or remember key facts, definitions, concepts, rules, and principles. Knowledge questions require students to repeat verbatim or to paraphrase given information. To know information, students need most often to rehearse or practice it, and then to associate it with other, related concepts. Dr. C. Ertuna

25. Knowledge cont. key action words:define, repeat , identify, what, label, when, list, who, name • Define the word xxxxxxxx . What is a xxxxxxxx . • Identify the xxxxxxxx in this yyyyyyyy . etc. Examples, specific to the courses you are taking from Dr. C. Ertuna: • How to compute PV of a single CF • What are the rules to consider a CF as an annuity • How to define skewness statistics • What are the correlation assumptions • How to run correlation test Dr. C. Ertuna

26. Higher Order Thinking Skills That is what I expect from You to develop! Dr. C. Ertuna

27. Organizing Organizing is used to arrange information so it can be understood. This is a higher level way of expressing what Bloom referred to as comprehension. This category relates to some of the skills in the Bloom level of comprehension and analysis. These tasks require learners to structure information so that it can be more deeply understood or presented more clearly. For example, to recognize and explain similarities and differences. Simple comparisons require attention to one or a few very obvious attributes or component processes. Higher levels of organizing also include grouping items into categories based on their features, sequencing things according to a given characteristic, and representing by changing toe form of the information to show relationships, such as taking an understanding and text and explaining things visually. • Comparing identifies similarities and differences between or among entities. • Classifying groups of items into categories on the basis of attributes. • Ordering sequences or ordering entities according to a given criterion. • Representing changes in the form of the information to show how critical events are related (visual, verbal, and symbolic). Dr. C. Ertuna

28. Organizing cont. key action words: compare, differentiate, contrast, order, classify, distinguish, relate • Compare the xxxxxxxx before and after yyyyyyyy . • Contrast the xxxxxxxx to the yyyyyyyy . • Differentiate between xxxxxxxx and xxxxxxxx . • Classify xxxxxxxx by zzzzzzzz. • Order zzzzzzzz by  yyyyyyyy. • Group these xxxxxxxx by yyyyyyyy Examples, specific to the courses you are taking from Dr. C. Ertuna: • What is Initial Outlay of the new project Dr. C. Ertuna

29. Applying Applying requires demonstration of prior knowledge within a new situation. Application is based on an individual's ability to apply previous learning to a new or a novel situation without having to be shown how to use it. The task is to bring together the appropriate information, generalization or principles (declarative and procedural knowledge) that are required to solve a problem.  The learner uses generalizations (e.g. ideas) in specific and concrete conditions. Learners are to apply prior knowledge and understanding to new situations and demonstrate that they can solve problems on their own. This means that teachers should  create a novel situation and expect the learner to apply prior knowledge to higher order tasks without being shown what to do. That is, they must recognize when information or skill is needed, and use it to solve new problems or complete novel tasks. the higher order thinking skill question requires knowledge learner currently should know yet a novel problem that they have not worked through before. Dr. C. Ertuna

30. Applying cont. key action words: apply, demonstrate, calculate, complete, illustrate, show, solve,  examine, modify, relate, change, classify, experiment, discover, dramatize, sketch Examples, specific to the courses you are taking from Dr. C. Ertuna: • Given the payment schedule and withdrawal schedule, how long will the proceeds of a lottery last? Dr. C. Ertuna

31. Analyzing Analyzing clarifies existing information by discovering and examining parts/relationships. Identifying attributes and components refers to recognizing and articulating the parts that together constitute a whole. Identifying relationships and patterns refers to recognizing and articulating the interrelationships among components (causal, hierarchical, temporal, spatial, correctional, or metaphorical; equivalence, symmetry, and similarity; difference, contradiction, and exclusion). In this operation, students divide a whole into component elements. Generally the part/whole relations and the cause/effect relationships that characterize knowledge within subject domains are essential components of more complex tasks. The components can be the distinctive characteristics of objects or ideas, or the basic actions of procedures or events. Dr. C. Ertuna

32. Analyzing cont. key action words: subdivide, categorize, breakdown, sort, separate • What are the basic elements (ingredients) in a xxxxxxxx . (what are the basic cash flow patterns ) • What is/are the functions of xxxxxxxx . • Inventory the parts of xxxxxxxx . • Categorize the xxxxxxxx of yyyyyyyy . • Sort the xxxxxxxx . • What is the order of steps in xxxxxxxx. Examples, specific to the courses you are taking from Dr. C. Ertuna: • Based on the given CF pattern which procedure would you apply (choose) to compute the PV? Dr. C. Ertuna

33. Generating Generating constructs a framework of ideas that holds new and old information together. • Inferring refers to going beyond the available information to identify what reasonably may be true. • Predicting refers to assessing the likelihood of an outcome based on prior knowledge of how things usually turn out. • Elaborating involves adding details, explanations, examples, or other relevant information from prior knowledge in order to improve understanding (explanations, analogies, and metaphors). Generating builds a structure of ideas that pulls together new and old information. Both deductive and inductive reasoning fall in this category. In deductive tasks, learners are given a generalization and are required to recognize or explain the evidence that relates to it. Applications of rules and "if-then" relationships require inference. In inductive tasks, learners are given the evidence or details and are required to come up with the generalization. Hypothesizing, predicting, concluding, elaborating based on prior experience all require learners to relate and integrate information. Dr. C. Ertuna

34. Generating cont. key action words: deduce; anticipate; predict what if; infer; apply; speculate; conclude • Hypothesize what will happen if xxxxxxxx . • Predict what would be true if xxxxxxxx . • Conclude what the result will be if xxxxxxxx . • What if xxxxxxxx had happened instead yyyyyyyy? Examples, specific to the courses you are taking from Dr. C. Ertuna: • What should be your WACC to accept this project? Dr. C. Ertuna

35. Integrating Integrating connects or combines prior knowledge and new information to build new understandings. Bloom called this synthesis. • Summarizing refers to combining information effectively into a cohesive statement. It involves condensing information, selecting what is important (and discarding what is not), and combining logical text proportions. • Restructuring refers to changing existing knowledge structure to incorporate new information. New information and prior knowledge are connected, combined and incorporated into a new understanding. The learner must: use old ideas to create new ones; generalize from given facts; relate knowledge from several areas. This means to summarize or restructure. Learners must demonstrate the ability to combine elements into a pattern not clearly there before. The learner puts together elements or parts to form a new whole, a synthesis of ideas. Dr. C. Ertuna

36. Integrating cont. key action words: combine, integrate, modify, rearrange, substitute, plan, create, design, invent, what if?, compose, formulate, prepare, generalize, rewrite, how would you test, make up, propose an alternative, compose, how else would you, design, state a rule, theorize, develop, devise, originate, revise, extend, synthesize, conceive, generalize, propose, create, integrate, project, hypothesize • Using xxxxxxxx, how many ways can you think of to yyyyyyyy? • Summarize in your own words the story of xxxxxxxx. • Make a plan to zzzzzzzz? • What might happen if  xxxxxxxx? • Can you make a  yyyyyyyy? • How can you improve or make xxxxxxxx better? • What ideas do you have for changing xxxxxxxx? Examples, specific to the courses you are taking from Dr. C. Ertuna: • If a bond is a par band, would you buy the bond, if your required rate of return is known? Dr. C. Ertuna

37. Evaluating Evaluating requires assessing the appropriateness and quality of ideas. • Establishing criteria sets standards for judging the value or logic of ideas. • Verifying refers to confirming or proving the truth of an idea, using specific standards or criteria of evaluation (checking the accuracy of facts, checking the meaning or accuracy of the author's statement by looking back at the text, using research results to verify the hypotheses). These tasks require us to judge quality, credibility, worth or practicality. Generally learners are expected to use established criteria and explain how these criteria are or are not met. Criteria are standards, rules, or tests on which a judgment or decision can be based. The criteria might be established rules of evidence, logic, or shared values. To evaluate, learners must assemble and explain the interrelationship of evidence and reasons in support of their conclusion (synthesis). Explanation of criteria for reaching a conclusion is unique to evaluative reasoning. Dr. C. Ertuna

38. Evaluating cont. key action words: evaluate, argue, judge, recommend, assess, debate, appraise, critique, defend • What you would do if xxxxxxxx happened. Why? • Judge what would be the best way to solve the problem of xxxxxxxx.. • Why did you select that solution? • Evaluate whether you would xxxxxxxx or yyyyyyyy . • xxxxxxxx in this situation. Why? Examples, specific to the courses you are taking from Dr. C. Ertuna: • Would you buy this stock and why? • What would be your recommendation, in terms of accepting or rejecting the offer and why? Dr. C. Ertuna

39. What Do You Want? • Do you want to analyze the situation or to recall solutions to previous problems? • Do you want to be capable of making your own comparisons or mimic what has been done before? • Would you rather make an inference or speculate? • Do you want evaluate or make a subjective judgment? Dr. C. Ertuna

40. Final Word This course is fun and moderately difficult, however, It requires you to: • Study to Understand • StudyRegularly (before and after the class) • Do plenty Exercise,and • Participate Actively in Class • Don’t listen to idiots that encourage you to get an F. It would be a very good idea to visit the Learning & Study Skills – a link on the instructor’s web page. Dr. C. Ertuna

41. Good Luck for the Semester  Dr. C. Ertuna