A financial derivative is a contract specifying a future payoff which depends on the value of an underlying asset or some condition. Futures and forward contracts, stock options, and interest rate and currency swaps are the most widely traded derivatives, but more exotic products based, for example, on nonfarm payroll figures, amount of snowfall, or the stock market volatility have become available with the rapid growth of the global markets.
Financial derivatives are used for hedging and controlling risk due to the unpredictability of market and economic fluctuations, for speculation by increased leverage, and for gaining exposure to an underlying that is not directly tradable. Derivatives have evolved into a ubiquitous and vital tool in the modern economies with the notional value of open contracts presently adding to more than 50 times the annual US gross domestic product. On the downside, derivatives have been called financial weapons of mass destruction for the damage their prodigal use could conceivably inflict on the entire financial system, as was borne out by the implosion of Long Term Capital Management L.P. in 1998.
This course is intended as a mathematical introduction to the valuation of futures, options, swaps, and related financial instruments and to the basic computational techniques employed in pricing derivatives. The main topics covered are:
Instructor:
Juha Pohjanpelto
Office/Phone: Kidder Hall 282B,
(541) 737-5156
Office hours: Wednesday 11:00 a.m. – 12:00 p.m., or by appointment
Email:
juha@math.oregonstate.edu
Homepage:
www.oregonstate.edu/~pohjanpp
Text: Goodman, Stampfli: The Mathematics of Finance: Modeling and Hedging, AMS, 2001.
Prerequisites: Solid background in undergraduate calculus, linear algebra, and probability theory will be helpful. No prior familiarity with financial markets will be assumed.
| • understands the definitions of the most important financial instruments and recognizes their pivotal applications. | |
| • is capable of determining the exercise price of futures and forward contracts. | |
| • is acquainted with binomial models for valuing plain vanilla and various exotic options. | |
| • appreciates the applications of the Black-Scholes model in pricing options. | |
| • recognizes the role of binomial and continuous models in hedging financial assets. |
The course grade will be based on four homework assignments, four in-class quizzes, and a take-home final exam, with the relative contributions of 30%, 30%, and 40%, respectively. The dates for the quizzes and the deadlines for the homework assignments are indicated in the course calendar.
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Last modified on March 20, 2011 by Juha Pohjanpelto.