COURSE NUMBER: MBA237.1
This course is cross-listed with the EWMBA Program
COURSE TITLE: Financial
Derivatives
UNITS OF CREDIT: 3.0
INSTRUCTOR: Nicolae
Garleanu
E-MAIL ADDRESS: garleanu@haas.berkeley.edu
CLASS WEB PAGE LOCATION: http://bspace.berkeley.edu
MEETING DAY(S)/TIME: Monday,
6:00 – 9:30PM
PREREQUISITE(S): MBA203
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.