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 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 or submitting corrections to course materials 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 Friday, August 2, 10:00AM--1:00PM. If you must miss the exam, please tell me as early as possible. If you miss the exam, I will substitute an oral exam in Zoom.
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 day of classes. 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: http://dybfin.wustl.edu/teaching/ or at the direct link http://dybfin.wustl.edu/teaching/derivsec24-1. You will also be able to reach the materials through the course's Canvas 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 and 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 Chapters | Hull Chapters | |
|---|---|---|
| Lecture 1 | 2.1, 5.3, 5.4, 5.5, 6.1, 6.3 | 5.1-5.8, 5.11 |
| Lecture 2 | 2.2, 2.3, 9.3, 10.1-10.6, 11.1 | 11.1, 11.2, 13.1-13.9, 13.11, 18.6, 18.7 |
| Lecture 3 | 3.2, 9.1, 9.3, 9.A, 15.3 | 11.3, 11.4, 11.5-11.7, 12.2-12.4 |
| Lecture 4 | 12.1-12.5, 12.A, 24.1-24.2 | 15.1, 15.2, 15.4, 15.5, 15.8, 15.9, 15.11, 15.12, 18.8, 19.4, 19.6 |
| Lecture 5 | 8.3, 8.4, 10.6, 25.1, 25.4 | 7.1, 7.6, 7.7, 7.9, 7.10, 29.2, 31.6 |
Teaching Assistance Yudong Rao will help in the offering the course. She is a doctoral student in economics who has done both theoretical and empirical researh. She did a great job as TA in Mathematical Finance for MSFQs in the Spring, and she has good quantitative and interpersonal skills. Her e-mail address is rao.y@wustl.edu. Of course, you can also direct your questions to me; send me e-mail at dybvig@wustl.edu.
About you In addition to enrolling through the proper authorities, please send me an e-mail with the following information:
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. I'm best known outside of academic finance for the 2022 Nobel Memorial Prize in Economic Sciences, which I was awarded alongside Ben Bernanke and my co-author Douglas W. Diamond. More information on me is in the chatty blurb at http://dybfin.wustl.edu/misc/about.html or in my vitae at http://dybfin.wustl.edu/misc/vitae.html. 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 other university resources.
Summary I invite you to join me in exploring the exciting world of derivative securities!
APPENDIX: some additional resources from the officialsOn a personal note, I would add that the university officials have a duty to do what is best for the university and also have their own agendas. If you are involved in a serious dispute, I recommend retaining your own legal representation to protect your rights.
Reporting Sexual Harassment If a student discusses or discloses an instance of sexual assault, sex discrimination, sexual harassment, dating violence, domestic violence or stalking, or if a faculty member otherwise observes or becomes aware of such an allegation, the faculty member will keep the information as private as possible, but as a faculty member of Washington University, they are required to immediately report it to the Department Chair or Dean or directly to Ms. Jessica Kennedy, the University's Title IX Director, at (314) 935-3118, jwkennedy@wustl.edu. Additionally, you can report incidents or complaints to the Office of Student Conduct and Community Standards or by contacting WUPD at (314) 935-5555 or your local law enforcement agency. See: Title IX Confidential Resources for Instances of Sexual Assault, Sex Discrimination, Sexual Harassment, Dating Violence, Domestic Violence, or Stalking: If a student needs to explore options for medical care, protections, or reporting, there are free, confidential support resources and professional counseling services are available through the Relationship and Sexual Violence Prevention (RSVP) Center in Seigle Hall, Suite 435, rsvpcenter@wustl.edu, 314-935-3445. For after-hours emergency response services, call 314-935-6666 or 314-935-5555 and ask to speak with an RSVP Counselor on call.
Academic Accommodations Reasonable Accommodations for Disabled Students - Washington University in St. Louis supports the rights of enrolled students to a full and equal educational opportunity and, in compliance with federal, state, and local requirements, is committed to reasonable accommodations for individuals with documented disabilities. Disabled students for whom accommodations may be necessary must be registered with, and provide their instructors official notification through, WUSTL's Disability Resources (https://students.wustl.edu/disability- resources/). Once established, responsibility for disability-related accommodations and access is shared by DR, faculty, and the student. Please contact Disability Resources at 314.935.5970 or disabilityresources@wustl.edu.
Sexual Assault Resources The University is committed to offering reasonable academic accommodations (e.g., a no-contact order, course changes) to students who are victims of relationship or sexual violence, regardless of whether they seek criminal or disciplinary action. If you need to request such accommodations, please contact RSVP (information above) to schedule an appointment with an RSVP confidential and licensed counselor. Although information shared with counselors is confidential, requests for accommodations will be coordinated with the appropriate University administrators and faculty. See: RSVP Center
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: brss.wustl.edu.Mental Health
Mental Health Services' professional staff members work with students to resolve personal and interpersonal difficulties, many of which can affect a student's academic experience. These include conflicts with or worry about friends or family, concerns about eating or drinking patterns, and feelings of anxiety, depression, and thoughts of suicide. See: https://students.wustl.edu/mental- health-services/ Additionally, see the mental health services offered through the RSVP Center listed above.WashU Cares WashU Cares, within the Health and Wellness Unit, provides resources to all students on the Danforth Campus who may be having a hard time. WashU Cares is committed to helping create a culture of caring. Through proactive, collaborative, and systemic approaches, WashU Cares works with students to identify interventions, resources, and supports that allow them to be successful. If there is a concern about the physical or mental well-being of a student, please file a report on the WashU Cares website. See: https://washucares.wustl.edu/.
Center for Diversity and Inclusion (CDI) The Center for Diversity and Inclusion (CDI) supports and advocates for undergraduate, graduate, and professional school students from underrepresented and/or marginalized populations, collaborates with campus and community partners, and promotes dialogue and social change to cultivate and foster a supportive campus climate for students of all backgrounds, cultures, and identities. See: https://diversityinclusion.wustl.edu/.
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Military Service Leave Washington University recognizes that students serving in the U.S. Armed Forces and their family members may encounter situations where military service forces them to withdraw from a course of study, sometimes with little notice. Students may contact the Office of Military and Veteran Services at (314) 935-2609 or veterans@wustl.edu and their academic dean for guidance and assistance. See: https://veterans.wustl.edu/policies/policy-for-military-students/.