Computational Finance- CS401
Instructor: Jaideep MulherkarAutumn 2022
DA-IICT, Gandhinagar
Course description: A derivative is a financial instrument that derives its price from an underlying asset like a stock. An example is a forward contract where two parties agree to buy/sell an asset at a fixed price at some future date. Another example is that of a call option where one party (option buyer) agrees to buy an asset from another party (option seller) at a future date. But in this case the contract is asymmetric, that is, the option buyer has the right but no obligation to exercise the option whereas the option seller is obligated to exercise the option at end date. Since the option buyer has no obligation to exercise he/she pays a certain fee to the option seller called the option price. There is a nice mathematical theory of option pricing which is based on principles of efficient markets and mathematical theory of probability. The Black-Scholes-Merton model of pricing a European call option is a landmark work in financial and economic theory which received the Noble price for economics in 1997. Current financial markets are replete with complicated financial instruments; exotic options and option exchanges are common place. Everyday billions of dollars of options are traded on various exchanges of the world. The Black-Scholes formula works under certain restricted settings but most options do not have a nice analytical formula for their price. The most popular technique for options pricing is Monte Carlo simulation .This course introduces the student to the theory of option pricing, financial derivatives, the famous Black Scholes formula and numerical and Monte Carlo techniques for pricing derivatives.
Prerequisites: Probability theory (SC-215).
Textbooks:
Options, Futures and other Derivatives, J.C. Hull and S. Basu, Pearson, 2010.
Paul Wilmott introduces quantitative finance, Paul Wilmott, Wiley and Sons, 2007
Stochastic calculus for finance I, S. Shreve, Springer (Finance), 2005
Course Notes:
Lab Manual:
Lab Manual
Grading:
25% each for 2 midterms and a final, 25% for lab.