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Introduction To Pricing Financial Instruments: Course Overview

This course provides an introduction to pricing financial instruments. It will cover topics such as interest rates, yields, credit risk, swaps, forwards and futures, options, and interest rate options. Students will gain an understanding of how these instruments are used and valued. The course focuses on building intuition rather than mathematical rigor. Assignments will include problems from the textbook and short programming exercises. The instructor is Bob Spruill and he can be contacted on QuantNet.

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46 views

Introduction To Pricing Financial Instruments: Course Overview

This course provides an introduction to pricing financial instruments. It will cover topics such as interest rates, yields, credit risk, swaps, forwards and futures, options, and interest rate options. Students will gain an understanding of how these instruments are used and valued. The course focuses on building intuition rather than mathematical rigor. Assignments will include problems from the textbook and short programming exercises. The instructor is Bob Spruill and he can be contacted on QuantNet.

Uploaded by

Rush2000
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Math 9814 / Fall 2010 / Spruill

Introduction to Pricing Financial Instruments


Course Overview
Purpose:
This survey course builds the intuition for, and describes the mathematical foundation of, modern methods to price, hedge, and measure the risk of individual financial instruments across asset classes. You will gain an understanding of what purpose these instruments serve, how they are related to other instruments, what factors influence their value, and to some degree how they are traded. More broadly, you will see the fundamental importance (and, in some cases, the limitations) of the no-arbitrage assumption in modern finance, and will gain an understanding of other assumptions upon which the field commonly relies. The focus of the course is not primarily mathematical rigor; nor is it programming or software design. Nevertheless, these thingsaddressed more fully in your other courseswill be integrated in presentations of key concepts, and to some degree in your assignments.

Instructor:
Bob Spruill will teach the course. He can best be contacted through QuantNet, where his screen name is bob. The instructor will be available on a limited basis for individual meetings, primarily after class.

Course Texts:
John HullOptions, Futures, and Other Derivatives, Seventh Edition Class notes posted on QuantNet

Assignments:
Weekly group homework assignments consisting of problems from Hull and relatively brief programming assignments In-class quizzes, which may be given at any time with no prior notice by the instructor Final

Topics:
Each of the Roman numerals below represents the topics for one or two class meetings, depending upon the pace that seems best for the group. If time permits, other topics may be added to provide some flavor of how the fundamental ideas illustrated by these simple instruments may be expanded to related, more complex instruments and more elaborate views of the financial universe. I. Interest zero-coupon bond, discount factors, zero rates, compounding, forward rates, interpolation, FRA Reference: Hull Chapter 4 II. Yield fixed-coupon bond, yield, bootstrapping, duration and DV01 Reference: Hull Chapter 4 III. Credit hazard rate and risky discount factor, credit spread, FRN, duration under credit risk, spread duration and DV01, CDS Reference: Hull Chapters 22, 23 IV. Swaps fixed-float swaps, cross-currency swaps, total return swaps, swap sensitivities and practical uses Reference: Hull Chapters 7, 23 V. Forwards and Futures forward contracts, FX and equity forwards, FX and equity futures, commodity futures, basis risk, minimum-variance hedge ratio Reference: Hull Chapters 2, 3, 5 VI. Options in Discrete Time put-call parity, binomial asset pricing model, statistical versus risk-neutral measures, European versus American options Reference: Hull Chapters 8, 11 VII. Options in Continuous Time geometric Brownian motion and the lognormal distribution, continuous-time selffinancing replication, the Black-Scholes PDE, a solution for vanilla European options Reference: Hull Chapters 12, 13 VIII. Option Greeks definitions of standard Greeks, analytic Greeks for the Black-Scholes model, numerical estimation of Greeks, interpretations and practical uses

Reference: Hull Chapters 10, 17 IX. Other Option Payoffs binaries, asset-or-nothing calls, barrier options, pricing of path-dependent options on trees, lookback options Reference: Hull Chapter 24 X. Interest-Rate Options forwards again, Blacks formula, change of numeraire, caps and floors, swaptions Reference: Hull Chapters 27, 28

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