The coursepack and its chapters will closely follow the online lecture videos. In addition to providing more details and depth than the lecture videos, the coursepack is intended to free the student from the burden of taking copious notes. Many students in the course will use the Coursepack as their primary text (a few may use the Coursepack as their only set of readings, though this is not recommended for everyone). There will be many exercises and problems in this coursepack. Students should do all of them. Solutions are provided. Students should be certain to understand all relevant readings in the Coursepack and be able to work through all relevant exercises.
Students requiring review in mathematics or elementary finance should do
so before the second week of the term (this is important). Comfort with
all of the material in the Elementary
Mathematics Review will be essential to this course. In addition,
material covered in an introductory finance course will be useful for
keeping up with the course. A separate page for exam
preparation may also prove quite useful. There are links to
sample exams as well. Feel free to report any difficulties to or
obtain any needed assistance from John
Teall.
|
A. Derivative Securities: A Brief Introduction B. Financial Securities, Instruments and Markets: A Brief Review Securities and Instruments Financial Markets Market Efficiency C. Introduction to Commodities, Forward and Futures Markets Commodities Forward and Futures Contracts Futures Contracts and Business Risk D. Introduction to Options Contracts and Markets European and American Options Options Markets E. Introduction to Swaps and Other Derivative Instruments Swap Contracts Collateralized Debt Obligations F. The Dark Side of Derivatives Week 2. Pricing, Returns, Arbitrage and No Arbitrage Models (Will overlap into Week 3) A. Brief Review of Time Value Yield Curves The Term Structure of Interest Rates B. Arbitrage and No-Arbitrage C. Probability and Risk Sets and Measures Probability Spaces Random Variables Conditional Probability D. Discrete State Models Outcomes, Payoffs and Pure Securities Spanning and Complete Markets Arbitrage and No Arbitrage Revisited The Equivalent Martingale: Synthetic Probabilities The Risk Neutrality Argument Binomial Option Pricing: One Time Period Put-Call Parity: One Time Period Completing the State Space E. Discrete Time-Space Models Discrete Time Models Multiple Time Periods and States: Illustration Week 3. Continuous Time and Continuous State Models (Will overlap into Week 4) A. Continuous Time Payment Models Single Payment Model Pricing a Bond with a Deterministic Continuous Rate B. Differential Equations in Financial Modeling: An Introduction Separable Differential Equations and Growth Models Security Returns in Continuous Time Mean Reverting Interest Rates C. Continuous State Models Option Pricing: The Elements Expected Values of European Options Call Options and Uniformly Distributed Stock Prices Week 4. Structure and Mechanics of Forward and Futures Markets A. Forward Contracts and Markets Forward Market Risks Forward Market Regulation B. Futures Contracts and Markets Futures Market Risks Currency and Interest Rate Futures Markets C. Order Types and Liquidity Orders Liquidity D. Futures Clearing and Settlement Trade Confirmation and Comparison Novation and Netting Trade Settlement E. Regulation of Futures Markets Major Legislation The Commodity Futures Trading Commission F. Prediction Markets Week 4. Pricing and Hedging with Forward and Futures Contracts (Will overlap into Week 5) A. Pricing Forward Contracts The Expectations Hypothesis Contango Backwardation The Net Hedging Hypothesis B. Forward and Futures Market Complications Dividends Carry Costs FX and Interest Rates: Interest Rate Parity Week 5. Structure and Mechanics of Options Markets (Will also include Section 7.A Random Walks and Martingales from the following) A. Option Contract Fundamentals Option Payoff Functions Minimum Option Market Values B. Options Exchanges Options Technology Options Clearing Week 6. Stochastic Processes: Introduction for Option Pricing A. Random Walks and Martingales Stochastic Processes: A Brief Introduction Random Walks and Markov Processes Martingales and Submartingales Equivalent Probabilities and Equivalent Martingale Measures B. Binomial Processes: Characteristics and Modeling Binomial Processes Binomial Returns Process Illustration: Binomial Outcome and Event Spaces Pure Security Prices Physical Probabilities, the Equivalent Martingale Measure and Change of Numeraire Binomial Pricing, Change of Numeraire and Martingales C. Brownian Motion and Itô Processes Brownian Motion Processes Brownian Motion Processes with Drift Itô Processes D. Option Pricing: A Heuristic Derivation of Black-Scholes Estimating Exercise Probability in a Black-Scholes Environment The Expected Expiry Date Call Value Observations Concerning N(d1), N(d2) and c0 Week 7: QUIZ
Week 8. Binomial
Option Pricing
A. Binomial Option Pricing: One Period Case The Hedge Ratio Pricing the Call in the One Period Case Risk-Neutral Setting: One-Period Case Illustration: Binomial Option Pricing - One Period Case B. Multi-Period Framework Extending the Binomial Model to Two Periods C. Multiplicative Upward and Downward Movements in Practice The Binomial Model in Practice: An Illustration Dividing an Interval Into Sub-Intervals Week 9. Fundamentals of Stochastic Calculus A. Stochastic Calculus: An Introduction Differentials of Stochastic Processes Stochastic Integration Elementary Properties of Stochastic Integrals B. A digression on Taylor Series Expansions Taylor Series and Two Independent Variables Taylor Series and the Differential Notation C. Itô's Lemma The Itô Process Itô's formula Itô's Lemma Applying Itô's Lemma Application: Geometric Brownian Motion Week 10. The Black-Scholes Model A. Preliminaries Self-Financing Strategies and Portfolios Pricing a European Call Option and the Black-Scholes Formula B. Deriving the Black-Scholes Model Black-Scholes Assumptions The Self-Financing Replicating Portfolio and Black-Scholes The Black-Scholes Model Put-Call Parity The Black-Scholes Model: Simple Numerical Illustrations B. Simple Numerical Illustrations C. Implied Volatility The Method of Bisection The Newton Raphson Method Smiles, Smirks and Aggregating Procedures D. Empirical Evidence The Black-Scholes Study The Galai and Bhattacharya Studies Smiles and Smirks Put-Call Parity Week 11. The Greeks, Dividend Adjustments and Early Exercise A. The Greeks Greeks Calculations for Calls Greeks Calculations for Puts B. The Black-Scholes Model and Dividend Adjustments The European Known Dividend Model Modeling American Calls Black's Pseudo-American Call Model C. Merton's Continuous Leakage Formula Week 12. Beyond Plain Vanilla Options on Stock A. Compound Options Estimating Exercise Probabilities Valuing the Compound Call The Roll-Geske-Whaley Compound Option Formula Put-Call Parity for Compound Options B. Changing the Pricing Numeraire C. Exchange Options The Margrabe Model The Garman- Köhlagen Model D. Hedging Exchange Exposure with Currency Options E. Exotic Options Locking in Profits Path Dependent Options Other Exotic Options Week 13. Other Derivatives and Markets A. Swap Contracts Equity Swaps Total Return Swaps Regulation of Swap Markets B. Structured Finance and Derivative Instruments Securitized Instruments Pass-through Securities Collateralized Debt Obligations Credit Derivatives Interest Rate Derivatives C. ADRs D. Hybrids Warrants Convertible and Callable Bonds E. Index Contracts Index Options Index Construction Portfolio Insurance and Program Trading F. Volatility Index Contracts Week 15: EXAM |
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