Finance 524B Derivative Securities Mini

Phil Dybvig
(314) 398-3196

Washington University Olin School

Focus: foundational concepts, tools, and applications of option pricing theory

Option pricing theory is one of great success stories of the application of scientific methods to business. Option pricing tools have applications across finance in such diverse areas as capital budgeting, investments, speculation, currency hedging, and (of course) pricing and hedging marketed options and futures. This course continues the introduction to option pricing concepts, tools, and applications. The main concepts are dominance, arbitrage, and artificial probabilities. The main tool we will cover is the workhorse binomial model of Cox, Ross, and Rubinstein, and we will also discuss its close relative, the original Black-Scholes model. The course will also discuss some additional institutions and the economic properties of various options and futures contracts.

Essential tools and concepts, up-to-date applications: The material covered in the course uses largely the same toolkit I described when I first taught this material over 30 years ago when no textbook was available. However, the applications have been updated and our perspective on these tools has evolved.

Prerequisites FIN524 Options and Futures or permission of the instructor. No special knowledge of mathematics beyond high-school algebra is required. However, as in most quantitative courses, students with the strongest math backgrounds will breeze through most easily. This course places quantitative demands on students typical of our other MBA finance courses.

Organization of the course The course will be in a traditional lecture format, with a final exam.

Course Requirements Grades in the course will be based mainly on the final exam, which will measure understanding of the tools and concepts from the lectures. Class participation may change a grade near a cutoff. Understandably, job search or other obligations may occasionally conflict with class. It is your responsibility to find out from your classmates what you miss when you are absent.

The final exam is scheduled on Tuesday, May 3, 1:00--4:00PM. If you must miss the exam, please tell me as early as possible. If you miss the exam, I will substitute an oral exam.

Course materials Course materials include slides, problem sets, and practice exams that are available on the web. There is no separate packet.

Slides The lectures will be based on slides that are available on the Web, one set of slides per week. You may want to print a paper copy of the slides before each class for cross-reference during class, for study, and for taking notes on. The slides and other materials are available on my teaching page on the web: or at the direct link You will also be able to reach the materials through the course's Blackboard page, which is a link to my website.

Textbooks The lectures and other materials I provide are self-contained, but most of the topics in the course are standard and you can find out more from a standard introductory book on options and futures. My favorite of the books I am familiar with is Derivatives Markets by Bob McDonald, ISBN-10: 0321543084, ISBN-13: 9780321543080. Bob McDonald is a top scholar who was one of the "inventors" of real options. This book is fun to read because it has good coverage of the underlying economics without skimping on the technical side. Options, Futures, and Other Derivatives by John Hull, ISBN 0-13-009056-5, is a "tried and true" text that has been around for a long while. This book is widely used in courses and on the street, although for my taste the writing is stilted and there is too much emphasis on the technical side to the exclusion of the economics.

If you want to look at either book, here is an approximate correspondence between the book and the lectures. In most cases, there is a lot more information in the text than what we need in the course, and there is some information in the course not covered in the books (or even the slides), so you should check with your classmates when you miss class.

McDonald ChaptersHull Chapters
Lecture 12.1, 5.3, 5.4, 5.5, 6.1, 6.35.1-5.8, 5.11
Lecture 22.2, 2.3, 9.3, 10.1-10.6, 11.111.1, 11.2, 13.1-13.9, 13.11, 18.6, 18.7
Lecture 33.2, 9.1, 9.3, 9.A, 15.311.3, 11.4, 11.5-11.7, 12.2-12.4
Lecture 412.1-12.5, 12.A, 24.1-24.215.1, 15.2, 15.4, 15.5, 15.8, 15.9, 15.11, 15.12, 18.8, 19.4, 19.6
Lecture 58.3, 8.4, 10.6, 25.1, 25.47.1, 7.6, 7.7, 7.9, 7.10, 29.2, 31.6

Teaching Assistance David Sovich will help in the offering the course. He is a doctoral student in finance doing mostly empirical work on a variety of topics. He has significant teaching experience as well as good quantitative and interpersonal skills. You will discover that we are fortunate to have his assistance. His e-mail address is

David is around the school a lot. His office is Simon Hall 264 and his phone number is (702) 824-3648. He will hold office hours 4-5 PM Mondays in his office. Of course, you can also direct your questions to me; I recommend a text at (314) 398-3196 or e-mail at
to track me down quickly. (Please do not put these e-mail addresses on any web site or mailing list. They are given in graphical form in a feeble attempt to slow down the spammers.)

About you In addition to enrolling through the proper authorities, please send me an e-mail with the following information:

If you enroll and later choose to drop the class, please let me know about that, too, with feedback about why the course didn't work for you.

About me I was previously a tenured full professor at Yale, and I came to Wash U in 1988 in the hope of building a top finance group, which we have done. More information on me is in the chatty blurb at or in my vitae at My Web pages can be accessed through my home page.

Feedback Feedback is especially important to me. Written feedback by e-mail is especially useful.

Integrity and Professionalism Students are expected to conform to the Olin School's Honor Code and Code of Professionalism. In particular, pay careful attention to the rules for the final exam (including "no notes or books allowed" and "no electronics." I will report any violations to the Disciplinary Committee (with considerable sadness but a strong sense of duty).

Other resources See the Appendix below for links to university resources for students who have experienced sexual assault, bias, or mental health difficulties.

Summary I invite you to join me in exploring the exciting world of derivative securities!

APPENDIX: some additional resources

Accommodations based upon sexual assault The University is committed to offering reasonable academic accommodations to students who are victims of sexual assault. Students are eligible for accommodation regardless of whether they seek criminal or disciplinary action. Depending on the specific nature of the allegation, such measures may include but are not limited to: implementation of a no-contact order, course/classroom assignment changes, and other academic support services and accommodations. If you need to request such accommodations, please direct your request to Kim Webb (, Director of the Relationship and Sexual Violence Prevention Center. Ms. Webb is a confidential resource; however, requests for accommodations will be shared with the appropriate University administration and faculty. The University will maintain as confidential any accommodations or protective measures provided to an individual student so long as it does not impair the ability to provide such measures.

If a student comes to me to discuss or disclose an instance of sexual assault, sex discrimination, sexual harassment, dating violence, domestic violence or stalking, or if I otherwise observe or become aware of such an allegation, I will keep the information as private as I can, but as a faculty member of Washington University, I am required to immediately report it to my Department Chair or Dean or directly to Ms. Jessica Kennedy, the University's Title IX Coordinator. If you would like to speak with the Title IX Coordinator directly, Ms. Kennedy can be reached at (314) 935-3118,, or by visiting her office in the Women's Building. Additionally, you can report incidents or complaints to Tamara King, Associate Dean for Students and Director of Student Conduct, or by contacting WUPD at (314) 935-5555 or your local law enforcement agency.

You can also speak confidentially and learn more about available resources at the Relationship and Sexual Violence Prevention Center by calling (314) 935-8761 or visiting the 4th floor of Seigle Hall.

Bias Reporting The University has a process through which students, faculty, staff and community members who have experienced or witnessed incidents of bias, prejudice or discrimination against a student can report their experiences to the University's Bias Report and Support System (BRSS) team. See

Mental Health Mental Health Services' professional staff members work with students to resolve personal and interpersonal difficulties, many of which can affect the academic experience. These include conflicts with or worry about friends or family, concerns about eating or drinking patterns, and feelings of anxiety and depression. See