The goal of the Options course is to develop tools to price and hedge and understand the risk exposures of any contingent claim on any underlying variable. The types of options considered include exchange-traded calls and puts, OTC exotic options, interest rate options, volatility derivatives, corporate securities such as callable bonds and warrants, and “real options” like power plants and mines. The option pricing techniques to be studied include binomial option pricing, Black-Scholes, Hull and White, and the option pricing super-theory known as risk-neutral valuation. Some specific topics are Geometric Brownian Motion and the mathematics of continuous-time stochastic processes; put-call parity and other arbitrage-free price option restrictions; Greeks; Monte Carlo Simulation; implied standard deviations and their statistical properties; exotic options; static and dynamic option replication trading strategies; and implied stochastic processes.
Lecture: 100min/wk and Recitation: 50min/wk