FE620 Pricing and Hedging

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Course Catalog Description

Introduction

This course deals with basic financial derivatives theory, arbitrage, hedging, and risk. The theory discusses Ito’s lemma , the diffusion equation and parabolic partial differential equations, and the Black-Scholes model and formulae. The course includes applications of asset price random walks, the log-normal distribution, and estimating volatility from historic data. Numerical techniques, such as finite difference and binomial methods, are used to value options for practical examples. Financial information and software packages available on the Internet are used for modeling and analysis. Corequisite: FE 610
Campus Fall Spring Summer
On Campus X X
Web Campus X X

Instructors

Professor Email Office
Dragos Bozdog
dbozdog@stevens.edu Babbio 429A
Jim Wang
jwang4@stevens.edu



More Information

Course Description

This course deals with basic financial derivatives theory, arbitrage, hedging, and risk. The course covers derivative instruments and underlines including stocks, bonds, forwards, futures, swaps, and options. By the end of the course, students will have good knowledge of how these products work, how they are used, how they are priced, and how financial institutions hedge their risks when they trade the products. Incorrect pricing of an instrument will create arbitrage opportunities. Risky positions are managed by proper hedging. Students are required to discover these arbitrage or hedging opportunities and enter simulated trades in an Interactive Broker or TD Ameritrade paper trading account. Information regarding the simulated trading platform and accounts will be provided.

 

Prerequisite:

Multivariable Calculus, FE 610, and programming in C++, or Java



Course Resources

Textbook

John Hull. Options, Futures, and Other Derivatives, 10th Edition. Pearson. ISBN: 978-0134472089




Grading

Grading Policies

Assignments - 35%

Attendance - 5%

Project - 30%

Final Exam - 30%


Lecture Outline

Topic Reading
Week 1 Introduction Ch. 1
Week 2 Futures Markets

Hedging Strategies Using Futures 

Ch. 2 & 3
Week 3 Interest Rates Ch. 4
Week 4 Forward and Futures Prices

Interest Rate Futures

Ch. 5 & 6
Week 5 Swaps

Securitization 

Pricing Adjustments 

Ch. 7, 8, & 9
Week 6 Options Markets

Properties of Stock Options

Ch. 10 & 11
Week 7 Trading Strategies

Binomial Trees

Ch. 12 & 13
Week 8 BSM Model

Employee Stock Options

Ch. 15 & 16
Week 9 Options on Stock Indices and Currencies

Options on Futures

Ch. 17 & 18
Week 10 Greek Letters

Volatility Smiles

Ch. 19 & 20
Week 11 Basic Numerical Procedures

Value at Risk and Expected Shortfall

Ch. 21 & 22
Week 12 Credit Risk Ch. 24
Week 13 Thanksgiving Recess – No Class
Week 14 Energy and Commodity Derivatives Ch. 35