FIN 271a: Options and Derivatives 2

Brandeis University IBS

Fall2017

Professor Reitano

Monday/Wednesday 12:30 – 1:50 PM

Location: TBD

Professor Robert R. Reitano

Brandeis Profile:

Email:

Office: Lemberg 253

Telephone: (781) 736-5204

Office Hours: M/W: 2:00-3:30 PM

By appointment

Teaching Assistant:TBD

TA Email:

Textbook:

John C. Hull, Options, Futures, and Other Derivatives, 9th ed. (Pearson Education, Inc., 2015, ISBN: 978-0-13-345631-8). The associated Student Solutions Manual is also highly recommended (ISBN: 978-0-13-345741-4). NOTE: There is now a 10th Edition of this book, but we will use the 9th since students likely have this from the prerequisite course FIN 270a.

A 9th edition textbook and solutions manual are on reserve in the library. Also on reserve as a mathematical reference is:Robert R. Reitano, Introduction to Quantitative Finance: A Math Tool Kit.(The MIT Press, Cambridge, Massachusetts, 2010).

Prerequisites: FIN 201a; FIN 270a.

Course Description:

As the name suggests, this course is intended to be a second course in Options and Derivatives, the goal of which is to introduce additional studies related to the financial derivatives markets and instruments. Our focus will be numerical implementation of option pricing approaches.

This course will address both pricingtheory and applications. In three sessions of eight lectures each we will cover most of chapters 13-15,21, 24-28, 31-32 and 34of Hull (9e), plus additional materials intended to better illuminate the readings. We will investigate numerical methods in all the topics westudy, so our focus is not just theory, but more importantly how the theory is implemented in practice with numerical methods. Students can use whatever computer language they are comfortable with or interested in, and as many students develop their programming skills as the course progresses, there is no programming prerequisite for this course.

In the first session we will begin with an empirical investigation into the stock return model introduced inthe FIN 270a, then review thebinomia option pricing modeland the Black-Scholes-Merton framework with particular emphasis on the numerical convergence of the binomial model prices to the BSM results. We will also investigate numerical methods for solving the BSM differential equation (easier than it sounds!), and touch on alternatives to the BSM approach. In the second session the focus will be on extending the tools of the first session to exotic and path dependent options, andalso study credit derivatives. In the third session we will address interest rate models and interest rate derivatives, and as time allows, energy and commodity derivatives.

We will not maintain a steady pace through the readings as some of the materials are easily handled by student pre-reading and class discussion and review, while other readings will be developed in detail in class and sometimes with additional enlightening materials. Students will be expected to develop a facility with the materials assigned in the readings in Hull. Class time will focus on developing and exploring the more subtle and quantitative topics, as well as clarifying ambiguities in the ‘easier’ readings concerning securities, market mechanics and conventions. Students can contribute materially to this latter class focus by identifying where these ambiguities exist.

It is expected that students will read each chapter in advance of the associated lecture.

Learning Goals:

-To understand the basics of financial derivatives pricing within the Black-Scholes-Merton framework:

  • How this mathematical modelrelates to the binomial option pricing approach and thus captures the fundamental notion of “pricing” derivatives contracts by “replicating” derivatives contract payoffs;
  • How the solutions to the BSM differential equation can be approximated numerically, and how to develop computer programs for finding approximate solutions and observing convergence.

-To extend the BSM framework to exotic options and credit derivatives

-To understand how the BSM framework can be modified to price interest rate derivatives:

  • To understand why these prices must now reflect a “market price of risk;”
  • To learn several interest rate models and their application to pricing interest rate derivatives.

-As time allows, to develop applications to energy and commodity derivatives.

Examinations:

There will be 3equally weighted take-home examinations assigned to space the material into thirds. These will be assigned near classes 9, 18 and 26. Each examination will test the students’ understanding of the concepts and methods discussed in the readings, class lectures and homework assignments.Many of the computer programs needed for take home exams will be developed in order to complete homework assignments.

There are no make-up examinations. Students are expected to hand in their examinations on time.

Exams may be discussed in general terms in student groups, but each student is expected to submit their own work.See Academic Integrity below.

Homework:

Advance readings will be assigned every class and students are expected to be familiar with these readings before the associated lecture. Homework problems will be assigned every week (usually on Wednesdays) and due at the beginning of the next class (usually Mondays). The goal of these exercises will be to illuminate the material developed in class through numerical examples, and to facilitate students keeping pace with the lectures and preparing for the examinations. It is essential that students keep up with assignments and not rely on last minute efforts for examinations.

Homework exercises may be discussed in general terms in student groups, but each student is expected to submit their own work, and on time. See Academic Integrity below.

Grading Method:

The final numerical average for each student will be the larger of two calculations:

Take-home I: 25%

Take-home II: 25%

Take-home III: 25%

Homework: 20%

Course Examinations:

Content of each examination will be detailed in advance with a Study Guide.

Take-home I: Around October 2 (class 9)Chapters 13-15, 21and class notes

Take-home II: Around November 6(class 18)Chapters 24-7and class notes

Take-home IIIDecember(TBA)Chapters 14-15, 21, 24-28, 31-32 and

34 and class notes

Disabilities:

If you are a student with a documented disability on record at Brandeis University and wish to have a reasonable accommodation made for you in this class, please see me at the beginning of the term.

Academic Integrity:

You are expected to be familiar with and to follow the University’s policies on academic integrity (see

You are expected to be honest in all of your academic work. Please consult Brandeis University Rights and Responsibilitiesfor all policies and procedures related to academic integrity. Students may be required to submit work to TurnItIn.com software to verify originality. Allegations of alleged academic dishonesty will be forwarded to the Director of Academic Integrity. Sanctions for academic dishonesty can include failing grades and/or suspension from the university. Citation and research assistance can be found at LTS - Library guides

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