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FIN 524B - Derivative Securities: March 21 - May 2, 2023

SYLLABUS

Class Meeting Times/Locations:

• Tuesday and Thursday 8:30am-9:50am Simon Hall 106

• Tuesday and Thursday 10:00am-11:20am Simon Hall 106

Credit hours: 1.5

Instructor: Thao Vuong

Email: [email protected]

Office hours: 11:30am-12:30pm Tuesdays in Simon Hall 272 You’re welcome to send me an email

at [email protected] to set up appointments as well.

Teaching Assistant: Taizhi Wu([email protected])

• TA office hours: 10-11 am Friday. Zoom link:

https://wustl.zoom.us/j/99262567217?pwd=eExwaTdXYlh6SmV1V1ZraWFyTHBndz09

Course description:

This course develops the theory of derivative security pricing and its applications. The focus of the course is on the pricing and hedging of derivative securities through the principles of no-arbitrage and the law of one price. We apply these concepts to dynamic trading models, through the devel- opment of the binomial tree model, the Black-Scholes option pricing model, and the risk neutral pricing methodology. We discuss several important applications of the pricing methodology, such as its implications for risk management, exotic options, and if time permits, the pricing of corpo- rate securities (corporate bonds, callable bonds, equity, etc.) and credit derivatives. The course is

analytical in nature, requiring some prior exposure to calculus, statistics and probability theory. Prerequisites: FIN5200 and FIN524.

Reading Material:

• Required: Teaching notes posted online

• Required: Robert L. McDonald, Derivative Markets, Addison Wesley, 2005, 2nd or 3rd edi- tion, ISBN 032128030X

• Optional: John C. Hull, Options, Futures and Other Derivatives, Whichever Edition, Prentice Hall

Grading

Problem sets, class attendance, and final exam are individually scored and count towards the final grade according to the following proportions: 40%, 10%, 50%, respectively.

Your final grade will depend on your performance in the class relative to your classmates.

Regrading requests must be made within one week after the grade has been returned. In mak- ing your requests, keep in mind the entire exam or assignment is subject to regrading. Thus, it is possible your score may be revised upwards or downwards.

Attendance and Participation: It’s very important to attend all classes. If you attend online, please also turn on your camera during each class meeting unless your surrounding environment does not allow you to. If you need to leave the classroom (your computer if you attend online) for a moment, please ask me for permission. I will explain how I record attendance in the first class meeting.

I might do cold calls in each class to facilitate in-class discussions. Please note that if your name is called and I don’t hear an answer, 1 point will be deducted from your attendance score.

Exceptions to this course attendance policy because of a COVID-19 diagnosis, symptoms consistent with COVID-19, or exposure to a person with a confirmed or suspected COVID-19 diagnosis that requires quarantine or isolation will be made in collaboration between the student and instructor (details below).

Class participation means voluntarily asking or clarifying insightful questions in class and an- swering questions which are posed to the class or arise during discussions. Class participation might be used to decide your grade in border cases (e.g., if you are between A and A- or between Pass and High Pass).

Assignments: There will be 4-5 problem sets, which can be done in groups of of up to 3 stu- dents. Groups should remain the same throughout the course. Only one group member needs to submit each assignment on behalf of other team members, however, names and student ID of each member must be clearly written on each assignment. If your name is not on an assignment, your score might be missing. When preparing for homework assignments, you can consult with all other students in this class (not only within your group), but the writing should be the group’s own writing.

Final exam: The final exam will take place in person on Tuesday, May 2, from 10am - 12pm. More details will be given later in the course.

Some tips

• Every student should attempt to solve the homework assignments by himself or herself before discussing the solution with other group members.

• I encourage you to participate in class by asking questions (let me know if something is not clear) and responding to my questions.

• Please limit email communication to simple questions about administrative issues. If you have questions that require long explanations about the course material, you should attend office hours or talk to me in class.

• I will do my best to accommodate everyone and guide you all through the learning process in order to get the best of you. The amount of material, level, and speed will be tailored to the students in this class. I will rely on your feedback in case I need to tune it up.

Olin’s Pillars of Excellence:

Students taking this class will attain the following emphasized skills

• Embody a values-based and data-driven ethos in their approach to all business situations

• Understand the global opportunities and challenges facing businesses

• Engage with business issues through the application of experiential knowledge, in addition to the rigorous technical skills acquired in the classroom

• Pursue world-changing initiatives with an entrepreneurial and innovative mindset and skillset

Course Policies:

The following policies will be enforced to prevent distractions and even the playing field:

• Students should not use laptops, tablets, PDAs, or other electronics during class.

• Students are expected to keep their mobile phones and pagers turned off during class. Students should not answer phone calls and students should not read or send text messages during class.

• Food is generally not permitted in class. Quiet beverages (no can opening) are OK.

• Students are expected to arrive and be seated prior to the start of each class session. They should display their name cards in all classes at all times.

• There will be no make-up exams unless disaster strikes.

Schedule and Topics (topics are subject to minor changes, coverage depends on actual flow of the class)

1. Binomial trees and risk-neutral pricing.

2. The Black-Scholes-Merton formula.

3. BSM formula empirical issues + Implied volatility.

4. Exotic Options and Monte Carlo Simulations.

5. American Options.

6. Corporate Securities as Options. (if time permits)

Olin’s Pillars of Excellence

Students taking this class will attain the following emphasized skills

1. Embody a values-based and data-driven ethos in their approach to all business situations

2. Understand the global opportunities and challenges facing businesses

3. Engage with business issues through the application of experiential knowledge, in addition to the rigorous technical skills acquired in the classroom .