Course objective:

The course covers a topic of derivative pricing, equity derivatives (European call and put options, exotic options), futures and forward contracts. The questions to be addressed in the class are: how do these contracts work and what are their payoffs? How are these derivatives used for hedging purposes and as a part of trading strategies? And, finally, how are they priced? The course highlights important ideas and concepts: absence of arbitrage, replication, and risk-neutral pricing. These will be introduced in the discrete-time models, continuous-time stochastic processes and stochastic calculus will be covered as we go.

Textbooks:

The course closely follows four textbooks:

• Hull J.: Options, Futures, and Other Derivative Securities, Prentice-Hall International, 1993 (H)

• Shreve S.: Stochastic Calculus for Finance I (SI)

• Shreve S.: Stochastic Calculus for Finance II (SII)

• Cerny A.: Mathematical Techniques in Finance, 2009 (C)

Time Schedule:

WEEK #1 - #3: INTRODUCTION TO DERIVATIVE MARKETS (H 1-10)

WEEK #4 - #6: DISCRETE-TIME ASSET PRICING MODELS (H 11, C, SI)

WEEK #7 - #8: OVERVIEW OF STOCHASTIC CALCULUS (H 12, C)

WEEK #9 - #12: THE BLACK-SCHOLES-MERTON MODEL AND PRICING DERIVATIVES (H 13, C, SII)