FINM6041 · Applied Derivatives
The Complete Exam Bible · S2 2026Applied Derivatives
FINM6041 Applied Derivatives is the Australian National University's postgraduate introduction to derivatives pricing and risk management, taught in the Research School of Finance, Actuarial Studies and Statistics and co-taught with the undergraduate FINM2002. Across twelve lectures it builds from the plumbing of forwards, futures and swaps through the core of option pricing — put-call parity, the binomial tree and Black-Scholes-Merton — on to the Greeks and dynamic hedging, and finally out to exotic options and the special world of credit, weather, energy and insurance derivatives. It is deliberately applied: the quantitative material is kept to what you actually need to price a contract and manage its risk, every idea arrives through a worked example, and in Week 11 a live Optiver trading simulation puts you in the market trading stocks, calls, puts and futures through a simulated shock.
The course is assessed by five redeemable in-tutorial quizzes, a team presentation that reviews and extends the previous week's lecture, and a final exam, with bonus marks available from the Optiver simulation. The stated weights are internally inconsistent in the course materials, so treat them as bands subject to confirmation on the current class summary: quizzes around 20–25%, the presentation 10%, and the final exam 65–70% (the two sample finals each stated 60%). The final is an in-person, invigilated paper of five questions with sub-parts — roughly 120 minutes of writing plus 15 minutes reading — sat with a provided formula sheet and N(x) tables and a non-programmable calculator. It rewards applying a method to a fresh scenario rather than memorising it: you must show all working (a bare answer scores zero), keep all decimal places, and binomial trees are capped at four steps.
What FINM6041 covers
Twelve lectures → one exam-ready map: from futures mechanics to Black-Scholes, the Greeks, exotics and credit — exactly as FINM6041 teaches them.
How FINM6041 is assessed
| Component | Weight | Format |
|---|---|---|
| Quizzes (5 × redeemable in-tutorial) | 20–25%, subject to confirmation on the current class summary | Five short in-tutorial quizzes (10–15 min each), redeemable toward the final exam · no alternate sitting · sat in your registered tutorial · UID checked, non-programmable calculator, pen only |
| Team Presentation | 10%, subject to confirmation on the current class summary | Work in a team to review and extend the previous week's lecture material, delivered in your registered tutorial · brief released on Canvas by end of Week 1 |
| Final Exam | 65–70%, subject to confirmation on the current class summary | In-person invigilated paper · 5 questions with sub-parts of unequal value · ~120 min writing + 15 min reading · formula sheet + N(x) tables and non-programmable calculator provided · show all working (no working = 0) · binomial ≤ 4 steps · the two sample finals each stated 60% |
| Week-11 Optiver simulation | Bonus marks (on top of the scheme) | Live derivatives trading game — trade stocks, calls, puts and futures and survive a simulated market shock · released on Canvas |
Put-call-parity arbitrage with zero out-of-pocket cash
- 2 marksTest put-call parity c + Xe^{−rT} = p + S₀. Left side: 4.20 + 45·e^{−0.05×0.25} = 4.20 + 44.4410 = 48.6410. Right side: 2.10 + 45 = 47.10.
- 1 markThe left side exceeds the right, so the call-plus-bond package is overpriced relative to the put-plus-stock package. Sell the rich side and buy the cheap synthetic: write the call, buy the put, buy the stock.
- 2 marksCash-flow it at t = 0: write call +4.20, buy put −2.10, buy stock −45.00, giving a net outflow of 42.90. Borrow 42.90 at the risk-free rate so your own net cash flow is exactly 0.
- 1 markAt expiry the long-stock + long-put − short-call bundle (all struck at X = 45) is worth exactly X = $45 in every state: if S_T ≥ 45 the call is exercised against you and delivers the stock for 45; if S_T < 45 you exercise your put and sell the stock for 45.
- 2 marksRepay the loan: 42.90·e^{0.05×0.25} = 42.90 × 1.012578 = 43.4396. Riskless profit = 45 − 43.4396 = $1.56.
Key terms
- Cost of carry
- The no-arbitrage link between a spot price and its forward or futures price, F₀ = S₀e^{rT}, adjusted for whatever it costs or pays to hold the asset: subtract the present value of known income, use e^{(r−q)T} for a dividend or foreign-currency yield, and add storage for commodities. One skeleton prices forwards on stocks, indices, currencies and futures alike.
- Put-call parity
- The identity c + Xe^{−rT} = p + S₀ tying a European call, a European put with the same strike X and maturity, the stock and a bond. It lets you build a synthetic option, spot mispricings, and run arbitrage; the dividend, FX and futures versions just swap S₀ for S₀e^{−qT}, S₀e^{−r_fT} or F₀e^{−rT}.
- Risk-neutral valuation
- Pricing an option as the discounted expected payoff using the risk-neutral probability p = (e^{rΔt} − d)/(u − d) rather than real-world odds. It underpins the binomial tree and shows why an option's value does not depend on the underlying's expected return — only on volatility and the risk-free rate.
- Black-Scholes-Merton (BSM)
- The closed-form price of a European option on a lognormal asset: c = S₀N(d₁) − Xe^{−rT}N(d₂), with d₁ = [ln(S₀/X) + (r + σ²/2)T]/(σ√T) and d₂ = d₁ − σ√T. Dividend yields, indices and currencies enter by replacing S₀ with S₀e^{−qT}; Black's model handles options on futures.
- The Greeks / delta hedging
- Sensitivities of an option's value to the inputs — delta (spot), gamma (delta's own drift), vega (volatility), theta (time) and rho (rates). A delta-neutral book is built by trading the underlying so the position's total delta is zero; a call's delta is e^{−qT}N(d₁), a put's is e^{−qT}[N(d₁) − 1].
- Basis risk
- The risk that the futures price and the spot price of the hedged asset do not move in lockstep, so a hedge closed out before delivery locks in F₁ + b₂ (initial futures plus final basis) rather than a perfect price. It is why real hedges are imperfect and why the minimum-variance hedge ratio h* = ρ·σ_S/σ_F matters.
- Comparative advantage (swaps)
- The logic behind an interest-rate or currency swap: two firms each borrow where they are relatively cheaper, then swap, splitting a total gain equal to the difference between the fixed-rate spread and the floating-rate spread. The trap is confusing comparative advantage (relative) with absolute advantage (cheaper in both markets).
- Credit default swap (CDS)
- Insurance on a bond or loan: the protection buyer pays a periodic spread on the notional and, if the reference entity defaults, receives (100% − recovery) × notional, less any accrued premium. CDS mechanics anchor the credit-derivatives block and the real-world 'Big Short' narrative examined in the course.
FINM6041 FAQ
Is FINM6041 hard?
It is cumulative rather than heavy on memorisation: the Greeks in Week 9 lean on the Black-Scholes-Merton of Week 6, which leans on the binomial tree of Week 5 and the option payoffs of Week 4, so the real danger is falling behind. The lecturer keeps the mathematics to what an applied course needs (deeper theory is pushed to FINM3003/3007/8009), and the exam is designed so roughly 70% should feel familiar, with about 30% testing whether you can link ideas and adapt them. The structural help is real: an issued formula sheet and N(x) tables, a non-programmable calculator, no double penalty for a carried-through arithmetic slip, and binomial trees capped at four steps.
What's on the FINM6041 exam and what is the format?
The final is an in-person, invigilated paper of five questions with sub-parts of unequal value, with roughly 120 minutes of writing plus 15 minutes of reading. A formula sheet and N(x) tables are provided and you use a non-programmable calculator. You must show all working — a correct number with no steps scores zero — keep all decimal places, and binomial trees are limited to four steps. Content sweeps the whole course: futures hedging, swaps, put-call-parity arbitrage, binomial trees, BSM, the Greeks and delta hedging, exotics, and the credit/weather/energy/integrity material. (The S2-2026 date and venue are subject to confirmation on the current class summary.)
Does FINM6041 use Black-Scholes?
Yes — Black-Scholes-Merton is a core lecture and a recurring exam topic. You compute d₁ and d₂, read N(d₁) and N(d₂) from the provided table (using the interpolation example on the formula sheet), and price European calls and puts, including the dividend-yield, index, currency and futures (Black's model) variants. You are not asked to derive the equation; you are asked to apply it accurately and keep your decimals.
What's the difference between FINM6041 and FINM2002?
They are the same lectures — every deck is branded 'FINM2002/6041 Derivatives' — but FINM6041 is the postgraduate code and FINM2002 the undergraduate one, and the assessments differ. The postgraduate paper carries extra sub-parts (typically the exotic-option and free-form 'design a position' extensions), so register and sit under the correct code. Note the postgraduate code was historically FINM7041 before migrating to FINM6041, which is why older sample finals read 'FINM7041'.
Is FINM6041 offered in Semester 2 2026?
Yes. ANU Programs and Courses lists FINM6041 Applied Derivatives as an in-person, 6-unit course running 27 July – 30 October 2026. It has run in earlier semesters too, so confirm the exact teaching, quiz and exam details on the current class summary before you enrol, since the available teaching materials are from a prior offering.
Do I have to memorise the formulas for FINM6041?
No — the exam issues a formula sheet with the cost-of-carry, parity, binomial, BSM, Black's-model and Greeks formulas, plus N(x) tables for x ≥ 0 and x ≤ 0. What is examined is judgement: choosing the right formula, converting rates to continuous compounding, keeping full precision, and interpreting the result. Building your own condensed version of that sheet while you study is one of the best forms of revision even though you cannot take it in.
What is the Optiver simulation in FINM6041?
In Week 11 the course runs a live Optiver derivatives trading game where you trade stocks, calls, puts and futures and try to survive a simulated market shock; it carries bonus marks awarded on top of the normal scheme. It pairs with a guest lecture from an Optiver market maker, and that guest material — what market makers do and how they handled unusual volatility data — is examinable, so treat the simulation as content, not just a game.
Can AI help me study FINM6041?
Yes — Sia is an AI tutor trained on how FINM6041 Applied Derivatives is actually taught and assessed at the Australian National University: it works through each pricing model and Greek step by step instead of just handing over answers. Try the free AI financial modeling tutor, or read this guide free and ask Sia as you go.
How to study for the exam
Study FINM6041 as one carry-and-parity skeleton reused across underlyings, not twelve disconnected topics: the same no-arbitrage logic that prices a forward (F₀ = S₀e^{rT}) reappears in put-call parity, in the binomial tree's risk-neutral probability, and in the q ↔ r_f ↔ r substitutions that turn a stock formula into an index, currency or futures formula — see it once and half the course collapses. Drill the recurring exam archetypes with fresh numbers: swap comparative advantage, futures hedging and hedge effectiveness, put-call-parity arbitrage with a full zero-out-of-pocket cash-flow table, binomial reverse-engineering (≤ 4 steps), BSM and delta-neutral hedging of a position book. Practise under exam conditions — issued formula sheet, N(x) tables, non-programmable calculator — and burn in the mechanical rules that cost easy marks: convert every quoted rate to continuous compounding first, watch delta signs when a position is short, keep all decimals, and always show working because a bare answer scores zero. Do not skip the narrative half of the course: the credit/CDS, weather HDD/CDD, energy, reinsurance, capital-market integrity and Optiver guest-lecture material is worth real marks, so keep a one-page crib linking each story to its mechanics. Finally, use the two sample finals for question style rather than answers (no solutions are given), and remember the examinable Canvas Q&A forum.
