IIT STUART GRADUATE SCHOOL OF BUSINESS
FINANCIAL MARKETS PROGRAM
COURSE SYLLABUS
Futures and Futures Markets
FM 505 - 077
Fall Quarter, 2004
Instructor: Frank Rose
Tel: 847-891-7756
E-mail: frose@stuart.iit.edu (primary) or franksrose@comcast.net (secondary)
Office Hours: By appointment.
Class Hours: Mondays; 6:00 pm - 9:15 pm.
Classroom: Room 485
Course Objectives:
In this course, we will examine futures markets from a variety of perspectives; e.g., theoretical, operational, evolutionary, domestic and global. Some of the topics which are introduced and discussed are treated in greater depth in other Stuart courses.
The specific objectives are:
1. To develop an understanding of the theory of futures markets.*
2. To gain a working knowledge of how these markets are used for pricing and risk management.
3. To become familiar with the breadth and diversity of the global futures markets; i.e., the products traded on them, their economic role, the issues faced by market participants and possible developments in the years ahead.
(*Note: Options on futures are discussed only briefly in this course. Options, including options on futures, are covered in detail in other courses.)
Course Format:
The first three classes will deal with basic theoretical and operational issues; the next six will focus on specific product groups with particular emphasis on uses of the futures contracts in each group. In the final, wrap-up class session, we will discuss a case study of the Chicago Board of Trade's transition to electronic trading.
A portion of each class will be devoted to a discussion of on-going developments in the industry. Students will be expected to bring in topics for class discussion. Students will be able to keep up with current events through the many available industry publications and web sites (e.g.; the exchanges, Futures Industry Association, Commodity Futures Trading Commission). A list of useful web sites will be posted in the External Links area of Blackboard.
The instructor will then go over homework problems, cover topics from the assigned reading, and introduce other related material not covered in the text. Student presentations and class discussions will supplement the instructor's presentations. Students will be expected to participate actively in class.
The course will end with a comprehensive final exam.
Text:
Futures, Options and Swaps (Fourth Edition); Robert W. Kolb. We will focus on the chapters dealing with futures and options on futures. This text provides a good treatment of theoretical, pricing and hedging issues. However, because it is not current with respect to many product and institutional topics, it will be supplemented with other readings, student presentations, and references to on-line sources of information.
Use of Blackboard:
Blackboard is used extensively in this course. It is essential that all students enroll on the Blackboard site for this course immediately after the first class session.
Calculators:
Students will need financial calculators (e.g.; TI BA II Plus, HP 10BII) to work problems in class, on quizzes and on the final exam.
Project 1 -- Simulated Trading Exercise:
Each student will establish a trading account with Stock-Trak and engage in simulated trading of futures and options on futures for six weeks. The Stock-Trak simulator serves essentially as an on-line discount brokerage providing execution services, trading support, quotes and research, and periodic reports. There is a $19.95 fee to use this simulator. This exercise will afford students the opportunity to become familiar with the mechanics of futures trading and to study the determinants of futures prices. Students will be able to design their own trading programs based on their interests and learning goals.
Part of the challenge of the simulation is to develop a trading program that can be successful in the Stock-Trak trading environment. Students who have trading experience may find that the functionality and the "rules of the game" of Stock-Trak are different from other marketplaces.
Students will be required to trade at least five different products and at least one spread. They will give informal oral updates in class at the mid-point of the exercise, and make brief oral presentations on their experience during the last regular class session.
A 10-page written report summarizing the trading experience will be required. The report will have eight sections - - an introduction specifying basic trading goals and approaches, sections summarizing and commenting upon each week's trading experience (i.e., a section for each of the six weeks), and a summary/conclusion stating results and lessons learned. A hard copy of the report will be submitted to the instructor for a final grade. Reports submitted after the deadline will be penalized. The grade for the exercise will not be based on profits and losses, but rather on the effort put into the exercise and the quality of the final report.
This exercise will provide a basis for more in-depth study of market analysis and trading strategies in later courses.
See "Guidelines for the Simulated Trading Exercise" for a more detailed description of the requirements for this project.
Project 2 -- Product/Market Presentations:
It is important that students leave this course with a good knowledge of the principal futures and options on futures products traded in the world's futures industry. The text does not provide up-to-date descriptions of these products and the markets on which they trade. Because of the rapid pace of product innovation in the industry, no text can remain current for very long.
In conjunction with each class session dealing with a product area (i.e.; agricultural, metals and energy; interest rates - short maturity; interest rates - long maturity; stock indices and single stock futures; foreign currency), students working in teams will make 30 minute product/market presentations describing salient features of the main products in that particular area. Each student will participate in one of these presentations. Teams will be established in the Groups area of Blackboard to facilitate communications among team members.
The presentations will provide overviews of product specifications, volume and open interest performance, issues relating to historical trading success and failure, recently developed products, competition among exchanges, any unique marketing approaches or regulatory issues, and any particular institutional arrangements associated with the trading environments (e.g.; market making systems, market access arrangements). Each team will post its presentation, along with any supporting materials, in the Discussion Board area of Blackboard for reference by other students in the class. A hard copy of each team's presentation will be submitted to the instructor for a final grade.
To the extent possible, subject to the requirement that all product groups be adequately covered, students will be allowed to participate in the product/market presentation of their choice.
See "Guidelines for Product/Market Presentations" for a more detailed description of the requirements for this project.
Project 3 -- Contract Proposals:
Through the simulated trading exercise, the product/market presentations and other discussions in the course, students will become familiar with the specifications of existing futures contracts. They will also become familiar with the economic purpose and uses of futures contracts for risk management, pricing and investment.
Students will be asked to demonstrate their understanding of contract design and use by preparing a proposal for a new futures or option on futures contract. The proposal will contain a description of the basic economic need for the contract (e.g.; What is the price risk that the contract could help users manage?), a description of the basic contract specifications (e.g.; How is the trading unit defined? What is the size of the contract? Is it settled by physical delivery or cash settlement?), justification of the contract specifications (e.g.; Why is the trading unit defined as it is?), and a roll-out plan which lays out key components of the product launch strategy (e.g.; At which exchange would this product be launched? Why? What target audience will be the focus of the marketing efforts?).
A 10-page proposal, covering the above points, will be required. Each student will summarize the proposal in a brief class presentation, submit a hard copy to the instructor for grading, and post a copy in the Discussion Board area of Blackboard for other students to read.
See "Guidelines for the Contract Proposals" for a more detailed description of the requirements for this project.
Attendance:
Students are expected to attend all classes and to be on time. Classes will begin promptly at 6:00 pm.
Academic Integrity:
The Code of Academic Honesty and Code of Conduct which govern all Stuart students will be strictly observed.
Grading:
Comprehensive Final Exam: 40%
Report on the Simulated
Trading Exercise: 20%
Product/Market
Presentation: 20%
Contract Proposal: 20%
(Note: Assigned homework problems will not be graded.)
Class Schedule:
Sept. 13 Course overview; Introduction to the markets; Chapters 1 - 2
Sept. 20 Pricing and market mechanics; Chapters 3 - 4
Sept. 27 Pricing and market mechanics (continued); Chapters 3 - 4
Initial discussion of goals and approaches for trading simulations
Oct. 4 Agricultural, metals and energy futures markets
Product/market presentation
Oct. 11 Agricultural, metals and energy futures markets (continued);
Interest rate futures markets - short maturity; Chapters 5 - 6
Product/market presentation
Oct. 18 Interest rate futures markets - short maturity (continued);
Interest rate futures markets - long maturity; Chapters 5 - 6
Product/market presentation
Discussion of trading simulations (mid-point status reports)
Oct. 25 Interest rate futures markets - long maturity (continued);
Chapters 5 - 6;
Stock index and single stock futures markets; Chapters 7 - 8
Product/market presentation
Nov. 1 Stock index and single stock futures markets (continued);
Chapters 7 - 8
Product/market presentation
Nov. 8 Foreign exchange futures markets; Chapter 9
Presentations of contract proposals
Nov. 15 Wrap-up discussion of futures market applications
Case study of an exchange's transition to electronic trading
Presentations of trading simulation results
Nov. 22 Comprehensive final exam