This syllabus is a draft. The final syllabus will be distributed the first day of class.
The topics covered are:
1. Financial Markets (A Review of Bond and Stock Pricing)
- measuring performance (returns and volatility)
- diversification, beta, the Capital Asset Pricing Model
- bond pricing
- duration, convexity
- mortgage markets
2. Futures
- future versus forward contracts
- hedging strategies using futures, cross-hedging
- stock index futures
- interest rate futures
- duration-based hedging strategies using futures
- hedging with duration and convexity
- futures prices of stock indices, currencies, commodities
3. Options
- payoffs from positions in European options
- hedging with options
- speculation using options
- factors affecting option prices
- the Put-Call Parity
- trading strategies including options (covered call/put, straddle, strangle, strips and straps, bull spread, bear spread, box spreads, butterfly spreads
4. Valuing Stock Options
- binomial Trees
- risk-neutral valuation
- delta hedging
- option pricing with binomial trees
- the Black - Scholes - Merton Model
- modelling stock prices (Wiener processes, Itô’s Lemma)