SI527: Introduction to Derivative Pricing

Prof. Suresh Kumar

Course Description:

This is a pretty interesting course (major part of it). This is the 1st course that is recommended if you are enthusiastic for a finance/quant job as  the concepts taught here have practical applications in these areas. It is a mix of probability concepts, financial topics and theoretical aspects.

Course Content:

  1. Types of financial securities, Present value and future value of money
  2. Cash flows, IRR, Annuities, Perpetuities
  3. Valuation, Bonds, Duration of bonds
  4. Term structure of interest rates, spot rates, forward rates
  5. Arbitrage and Forward pricing, Futures
  6. Swaps
  7. Types of Options, Option strategies, bounds on option prices, put-call parity
  8. Conditional expectation, Measurability (very theoretical part starts from here)
  9. Martingale theory, random walk, Brownian motion
  10. Properties of Brownian motion and martingales
  11. Stochastic process, Ito integral, Ito process, Ito calculus
  12. Ito’s formula and Girsanov’s theorem
  13. Binomial Pricing, Delta-hedging
  14. Black-Scholes model and pricing of options using Black-Scholes  formula

Attendance, Course Load and Grading:

No attendance required but it is essential to understand the concepts thought as they are tricky and require thought.

2 hours of lectures per week, 1 hour of tutorial per week. Overall load is moderate but one needs to understand concepts very clearly to do well.

Policy: 2 quizzes (10% each), midsem (30%), endsem(50%)

Prerequisites:

SI 417 – Introduction to probability theory

References:

Forwards, Options and other Derivatives, John C. Hull

Added Information:

One must pay a lot of attention in classes to grab the concepts. The post-midsem syllabus is relatively difficult and very theoretical in nature. Most people lose track of the course in the second half.Notes and Tutorials are enough to study but as stated earlier tutorials can be solved only if theory is understood well and one must consult the professor in case of doubts since no solutions are available.

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