COURSE NUMBER: EWMBA 237-2

COURSE TITLE: Financial Derivatives

UNITS OF CREDIT: 3

INSTRUCTOR: Nicolae Garleanu

E-MAIL ADDRESS: garleanu@haas.berkeley.edu

CLASS WEB PAGE LOCATION:  bSpace

MEETING DAY(S)/TIME: Tuesdays 6:00 p.m. to 9:30 p.m.

PREREQUISITE(S): EWMBA core curriculum

CLASS FORMAT: lectures and short cases

REQUIRED READINGS: lecture notes, additional material posted on line; textbook readings recommended

BASIS FOR FINAL GRADE: midterm and final examinations, class participation, problem sets (homework)

ABSTRACT OF COURSE'S CONTENT AND OBJECTIVES:
The derivative class is the largest asset class worldwide, comprising securities worth more than $35 trillion and laying claim to assets worth almost $600 trillion. (In contrast, the total value of all publicly traded companies in the world is around $50 trillion.) The extraordinary size and growth of this class owe to the usefulness of derivatives as instruments for taking tailored risk positions. For example, a gold miner can (pay a price to) eliminate the risk it has to sell gold below $800/oz; an investor bullish on Microsoft can take a position that pays off when the price of Microsoft climbs to a value between $30 and $35, but not otherwise; a European exporter can shield itself against revenues dropping due to the rise of the Euro above $1.60; a bond investor can pass the default risk in its bond portfolio to another, perhaps more risk tolerant, investor; etc. In addition, the main features of derivatives characterize all common corporate securities and numerous other financial contracts – for instance, the contracts used by the US government to inject cash in various firms in 2008-2009.

The main goals of the course are that students learn: (i) what derivatives are, (ii) how to use derivatives, and (iii) how to price derivatives.

The course is going to introduce a large number of derivatives, starting with the standard ones –   futures, forwards, swaps, and plain-vanilla options – and continuing with more “exotic” ones – exotic options, credit default swaps (CDS), asset-backed securities (e.g., MBS, CDO), etc. A very important aspect of the course is the fair pricing of derivatives; based on the notion of “no arbitrage”, the course will derive the correct price for the derivatives studied, which will involve building models of the statistical behavior of underlying-asset (e.g., equity, currency, or commodity) prices. These models also allow precise statements concerning the correct derivative position to take in order to achieve a particular risk exposure, whether motivated by speculative or hedging reasons. The course will introduce precise metrics for the evaluation of a portfolio's risk, ranging from the classical ones, such as variance or beta, to ones developed more recently, such as value at risk (VaR).

BIOGRAPHICAL SKETCH:
After obtaining his PhD in Finance from the Stanford GSB, Professor Garleanu taught at INSEAD and Wharton before moving to Haas in 2007. At Haas, he has taught the core finance course in the day MBA program and modules on derivatives and on risk management in the IMCA executive program.

Professor Garleanu's research studies theoretically the determinants of asset prices. Thus, his papers investigate the average equity-market return in excess of bond returns, the difference in returns between growth and value stocks, apparent systematic anomalies in the prices of options, the effect of liquidity in  over-the-counter markets,  the impact of trader funding constraints, and others. His papers have been published in top scholarly journals including Econometrica, the Review of Financial Studies, the Journal of Financial Economics, and the Journal of Economic Theory.