Option Pricing: Theory and Practice

FIN 890, Fall 2023, Wednesdays, 2-4 p.m.

Office Hours: Wednesdays, 1:00-2:00 p.m. Or by appointment. liuren.wu@baruch.cuny.edu.


The class will start with an overview of the philosophies underlying the first-generation option valuation models and their contrasts with the valuation of primary securities. Then the class will introduce two general threads in the development of option pricing models. One is a general framework for designing and estimating second-generation bottom-up option pricing models based on time-changed Levy processes. The other is a more recent development in decentralized top-down option pricing.


There can be many different objectives for developing option pricing models. I will discuss the modeling efforts from the perspective of option investments.

I will make an overview discussion on each topic. Students are required to read the listed papers, implement a representative model in each category,  and analyze their pricing performance and their applications in option investments.


Each student is required to write 2-3 term papers, one on each model/framework. Two students can work together on a given paper. The paper can be a replication or independent design and implementation of a particular model, with the ultimate objective of performing a particular type of option investment based on the model implementation.


The empirical implementation can be done on options on any underlying securities. OptionMetrics (via WRDS) provides options data on individual stock options and options on stock indexes and ETFs. You can download OTC option implied volatility quotes from Bloomberg on currency options, swaptions, and interest rate caps/floors. You can also obtain data for commodity futures options from CME.