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, marktomarket, margins, the role of
clearinghouses. The use of futures in basic hedging strategies. Introduction
to swaps as a natural extension of forwards and futures. Putcall parity in
ideal markets as well as for hardtoshort stocks. Further basic pricing
restrictions on American and European options, and analysis of the optimal
exercise policy for American options. Thorough and indepth treatment of
binomial pricing of options and associated hedging strategies. Discussion of
limits to arbitrage. Introduction to the BlackMertonScholes 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 required, but it offers
alternative explanations and additional material that many students find
useful. 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 inclass closedbook and closedlaptop, but
you should bring a calculator with the exponential function. Office
Hours: I am available in Evanston every Wednesday 34, 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
