Finance 465:
Derivatives Markets I Fall 2014 A rigorous and quantitatively demanding course on
futures, options and related derivative securities, with emphasis on
arbitrage pricing and hedging methods. Course Information Course Materials and Announcements will be
posted on Canvas. Prerequisites: Finance 430 or 440.
Willingness to engage in analytically involved reasoning. Willingness to put
in the effort required for conceptual understanding as opposed to
memorization and mechanical plugging in of formulas. Topics: Introduction to
forward contracts and options. Basic strategies for hedging or speculation
using forward contracts, calls and puts. Arbitrage relationship between spot
prices and forward prices. More elaborate forward pricing when the underlying
pays dividends, cost of carry, securities lending, and convenience yields.
Applications to commodities and foreign exchange. Overview of futures
markets: OTC markets versus exchanges, mark-to-market, margins, the role of
clearinghouses. The use of futures in basic hedging strategies. Introduction
to swaps as a natural extension of forwards and futures. Put-call parity in
ideal markets as well as for hard-to-short stocks. Further basic pricing
restrictions on American and European options, and analysis of the optimal
exercise policy for American options. Thorough and in-depth treatment of
binomial pricing of options and associated hedging strategies. Discussion of
limits to arbitrage. Introduction to the Black-Merton-Scholes option pricing
theory, and associated risk management techniques. Overview of option pricing
applications in corporate and other settings. Recommended Text: Derivatives
Markets, by Robert L. McDonald. The text is not strictly required, but it
offers alternative explanations and additional material that most students
find useful. Here are solutions to the
text’s even-numbered questions. These are intended for self-study only. Please
note: The solutions refer to the second edition. I will post solutions to
the third edition as soon as I receive them. If you already have the second
edition, you do not need to purchase the third edition for this course. If
you are planning to purchase the text, you should get the latest edition. Grading: The
course grade is the maximum of the following two weighted averages Homework Groups: Problem
sets should be prepared in groups of up to four people. Only a single
solution set per group should be turned in. You do not have to belong to the
same group for every problem set. It is also OK to complete homework
individually. Exams: The
midterm and final exams will be in-class closed-book and closed-laptop, but
you should bring a calculator with the exponential function. Office
Hours: I am available in Evanston every Wednesday 3-4, in Chicago an hour
prior to each lecture, or by special appointment. Please always email me in
advance with the time you are planning to attend office hours. Teaching Assistant: TBD Some Related Links
Finance news
Financial
Times Bloomberg
Financial Information Exchanges
Chicago Board of
Options Exchange Other related links
Commodity Futures
Trading Commission Securities and
Exchange Commission The
Options Clearing Corporation |