Course title
Financial Engineering

yasuoka takashi
Class name
Financial Engineering
  • Futures
  • Market risk
  • Options
  • Real options
  • Management strategy
Course description
This course is designed for students to learn about aspects of financial derivatives and the approach used for real options. It introduces practical applications of futures and options. Uncertain events are modeled by using a simplified binomial model. Options are priced in the binomial model.

Binomial pricing is applied for real options. As examples, the postponement option, abandonment option, and rival's strategy are studied. These are a tool in management strategy.
Purpose of class
The purpose of this course is to learn business-value evaluation by using real options. The students will understand that real options are useful as a strategic business tool.
Goals and objectives
  1. Futures trading for risk management
  2. Modeling uncertain events using binomial models
  3. Business valuation using real options
Class schedule

Class schedule HW assignments (Including preparation and review of the class.) Amount of Time Required
1. Guidance; Financial risk; Interest rates; Risk–return; Government bond yields; LIBOR. Chapter 1 in Ref. 1 or
Chapter 3 in Ref. 2
2. Present value; Bond prices and interest rates; Interest rates and discount factors; Principle of no arbitrage; Futures and forwards; Theoretical price of futures. Chapter 2 in Ref. 1 or
Chapters 3 and 5 in Ref. 2
3. Aspects of commodity futures; Price-change risk for materials; Risk hedging strategy with commodity futures. Handout 150minutes
4. Hedging commodity price risks using futures.; Virtual trading using historical market data. Handout 180minutes
5. Aspects of options; Call/put options; Option styles; Commodity options; Currency options. Chapter 3 in Ref. 1 or
Chapter 5 in Ref. 2
6. Examples of stock options; Virtual trading using historical market data. Chapter 3 in Ref. 1 or
Chapter 5 in Ref. 2
7. Modeling of uncertainty; Simple pricing options by using a binomial lattice; Risk-neutral measure and real-world measure. Chapter 4 in Ref. 1
8. Business evaluation using the discounted cash flow (DCF) method; DCF method and uncertainty; Strengths and weaknesses of DCF method; Exercise. Handout 180minutes
9. Aspects of real options; Case of postponement options; Effect of postponement on business value. Handout 180minutes
10. Case study of postponement option; Difference between real option and DCF methods; Meaning of the value of postponement options. Handout 180minutes
11. Aspects of abandonment option; Business valuation considering business abandonment in future. Chapter 7 in Ref. 3
12. Case study of abandonment option: When should we sell unused real estate? Chapter 7 in Ref. 3
13. Example of real options: Business strategy with respect to rival's strategy; Nash equilibrium. Chapter 3 in Ref. 3
14. Real-option approach with respect to rival's strategy; Difference in strategy between leader and follower. Chapter 3 in Ref. 3
15. Presentation of the final report. Preparation for final paper 240minutes
Total. - - 2700minutes
Relationship between 'Goals and Objectives' and 'Course Outcomes'

workshop 1 workshop 2 workshop 3 Final report Total.
1. 20% 10% 30%
2. 10% 20% 30%
3. 20% 20% 40%
4. 0%
Total. 30% 30% 20% 20% -
Evaluation method and criteria
Discussion and questions: 15 pt.
Exercise: 25 pt.
Final report and presentation: 60 pt.

60 pt. of the final report is evaluated as follows:
 Final report answers to the request of the final subject. 70%-
 Final report properly answers to the request of the final subject.  80%-
 Final report properly and reasonably answers to the request of the final subject.  90%-
Textbooks and reference materials
Reference 1, T. Yasuoka: Risk and derivatives for bond investment, Daigaku-kyoiku shuppan.
Reference 2, T. Yasuoka: Shijou risk to derivative [Market risk and derivatives], Asakura.
Reference 3, The Japan Association for Real Options and Strategy: Real option to keiei senryaku [Real option and business strategy], Sigma Base Capital.
Completion of the course “Finance”, or equivalent knowledge.
Ability to perform basic calculations using Excel.
Familiarity with basic stochastics and statistics.
Course objectives
Decision-making methodologies for business
Office hours and How to contact professors for questions
  • One our before and after class
Relation to the environment
Non-environment-related course
Non-regionally-oriented course
Development of social and professional independence
  • Course that cultivates an ability for utilizing knowledge
  • Course that cultivates a basic problem-solving skills
Active-learning course
About half of the classes are interactive
Last modified : Sat Nov 11 04:00:41 JST 2017