Phil Dybvig dybvig@wustl.edu (instructor)
Shreye Mirani shreye.mirani@wustl.edu (TA)
Yudong Rao rao.y@wustl.edu (TA)
Prerequisites FIN 524 and either FIN 5203 or FIN 510, 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.
Course materials
Section 1: http://dybfin.wustl.edu/teaching/derivsec25-1
Section 2: http://dybfin.wustl.edu/teaching/derivsec25-2
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.
Learning goals Mastery of a set of tools for option pricing that can also be used for "real options" that are ubiquitous in practice.
Organization of the course Lectures, review sessions, problem sets, and a final exam.
Course Requirements Grades will be based 100% on the final exam. I will give a modest amount of extra credit for good suggestions on how to improve the course. 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.
Final Exam The final exam will be a written exam, held in person unless we have to go online. The exam is closed-book with no notes or electronics (phones, calculators, laptops, iPod, etc.). 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.
Teaching assistance Teaching assistance will be provided by Shreye Mirani shreye.mirani@wustl.edu and Yudong Rao rao.y@wustl.edu. Shreye is a Finance PhD student working on corporate finance and macro finance, with current work on the impact of fiscal policy on financial markets. Yudong is an Economics PhD student working on banking and international finance, with current research on the role of the Federal Home Loan Banks in the funding of banks. The TAs are available to give you any help you need to master the material. Of course, you can also get help from me dybvig@wustl.edu.
Course materials Course materials include slides, problem sets with solutions, and practice exams with solutions. Slides cover the material in the course. These slides will not be used in the lectures, which will use a whiteboard format in person (or perhaps occasionally in Zoom). Problem sets give you practice using the tools in the course, and solutions are provided. The TAs will also go through the solutions in a help session. Practice exams and solutions will be posted later. Course materials can be found at the links at the top of this syllabus. There will not be any textbook or packet, but if you are eager to do outside readings, there are suggestions at the bottom of this syllabus.
Integrity and Professionalism Students are expected to conform to the Olin School's Honor Code and Code of Professionalism. I will report any violations to the Disciplinary Committee (with considerable sadness but a strong sense of duty). It is easy to follow the rules in this course, but it seems that every year there are a few students who have to delay graduation to retake the course.
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.
Course Description Provides an in-depth analysis of valuation and trading strategies for options and other derivative securities which have applications across areas of finance such as hedging, swaps, convertible claims, mortgage payments, index arbitrage, insurance, capital budgeting and corporate decision making, and are responsible for many new innovations and developments of the financial markets. Students may not receive credit for both this course and FIN 5460.
Schedule:
Section 1 classes: in person, Simon Hall 113, Tuesday-Thursday 1:00-2:20 PM, March 18, 2025 through April 24, 2025
Section 2 classes: in person, Simon Hall 113, Tuesday-Thursday 2:30-3:50 PM, March 18, 2025 through April 24, 2025
TA sessions: times and locations TBA
Final exam (both sections): Simon Hall 103 and 105, Wednesday 1:00-4:00PM, April 30
Supplementary 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 |
Additional resources from the university and university-wide guidelines The university has a number of resources that can help you, see https://bpb-us-w2.wpmucdn.com/sites.wustl.edu/dist/f/4662/files/2024/12/Syllabus-Resources-and-Template-Language-Danforth_SP2025_Final.pdf. Topics include sexual assault and other harassment, disability resources, military service leave, preferred name and personal pronouns, emergency preparedness, academic integrity, unauthorized recording and distribution of classroom activities and course materials, COVID-19 health and safety protocols, bias reporting, career engagement, psychological services, writing help, learning support, voting, and libraries. On 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.