| # | Date | Topics | Homework |
|---|---|---|---|
| 1 | M 1/29 | Introduction | Browse in the chapter on stocks in [SP] |
| - | - | - | HW 1 (do not hand in) |
| 2 | W 1/31 | Return, log return (handout) | HW 1 (con't) |
| 3 | F 2/2 | Interest rates | - |
| 3 | M 2/5 | [no class] | - |
| 4 | W 2/7 | Interest rates (con't). Handout | HW 2 and two problems on bottom of handout. Due 2/12. |
| - | - | Present and future value | - |
| 5 | F 2/9 | Interest and returns (con't) | - |
| 6 | M 2/12 | Data analysis with SPSS | HW 3 (due 2/16) |
| 7 | W 2/14 | A quick trip through probability and statistics (handout) | - |
| 8 | F 2/16 | Probability and statistics (con't) | - |
| 9 | M 2/19 | Futures (S&P Guide, Hull 1.4) | - |
| - | - | Forwards and their pricing (Hull 1.3, 5.7) | HW 4 (due 2/23) |
| - | - | The interest rate (Hull 4.1) | - |
| 10 | W 2/21 | Random walk (excel demonstration and handout) | - |
| 11 | F 2/23 | Brownian motion (con't) | - |
| 12 | M 2/26 | Geometric Brownian motion: summary, excel demonstration, and estimating the parameters. Reading: Hull 12.1--12.4 | HW 5: Hull p. 123: 5.3; p. 266: 12.1, 12.2, 12.8 (due 3/2) |
| 13 | W 2/28 | Quiz 1 on interest rates, present and future value | - |
| - | - | Introduction to options. Reading: Hull 1.5 | - |
| 14 | F 3/2 | Options (con't). Reading: Hull: rest of ch. 1 | Terminology: call/put, premium/strike price/expiration date, long (buying)/short (writing) position, in/at/out of the money, European/American, naked/covered calls |
| 15 | M 3/5 | Two ways to invest with options (Hull p. 12-14) | - |
| - | - | Quiz 2 (on probability and statistics) | - |
| 16 | W 3/7 | Bachlier (payoff) diagrams (Hull Ch. 10): bull and bear spreads and the butterfly | - |
| - | - | - | Test I (due 3/12 at the start of class) |
| 17 | Fri 3/9 | Trading game (Wilmott Ch 14) | - |
| 18 | M 3/12 | Standard error and confidence intervals for the mean and standard deviation | - |
| 19 | W 3/14 | [no class] | - |
| 20 | F 3/16 | Guest lecture by R. Jordan: "Random walks, Brownian motion and the diffusion equation" | - |
| 21 | M 3/26 | [Go over Test I] | Make summary chart of puts and calls (do not hand in--just for your own use. Can omit--better to do the 500 penny stock market.) |
| 22 | W 3/28 | The one-step binomial tree: an example (Hull 11.1) | - |
| - | - | Put-Call parity (Hull 9.4) | Homework 6: Properties of American options (due 4/23) |
| 23 | F 3/30 | The one-step binomial tree: general case (Hull 11.1) | (Handout) |
| 24 | M 4/2 | Risk-neutral probabilities (Hull 11.2) | HW 8 (due 4/4): Hull p 16: 1.4, 1.7 (Assume that the option is European. Explain gains/losses in three cases: the stock price in three months is either $50, $40, or $30), 1.9 (Explain the gains and losses assuming that the stock price in three months is either $40 or $25.) |
| - | - | - | Yahoo's financial glossary |
| - | - | - | Quiz2 (bis): Second version of quiz 2. |
| 25 | W 4/4 | arbitrage argument for put-call parity | HW 7: Estimating drift, volatility and their confidence intervals from data (handout) due 4/9 |
| 26 | F 4/6 | two-step trees (numerical examples) | HW 9: Hull p. 261: 11.1, 11.4 (do both directly, as on p. 241-2, and using risk-neutral probabilities, as in 11.2), 11.5, 11.6 (use risk-neutral probabilities) due 4/13 |
| 27 | M 4/9 | stock indices, correlation coefficient | - |
| 28 | W 4/11 | covariance (mathematical aspects), scatter plots | Quiz 3 |
| 29 | F 4/13 | From trees to the Black-Scholes formula (handout, also Hull XX) | - |
| 30 | M 4/16 | The 500 penny stock market | - |
| 31 | W 4/18 | Evaluating the BS formula by hand; using DerivaGem | - |
| 32 | F 4/20 | Derivation of the Black-Scholes PDE (Hull 13.6, p. 291) | April options expire--for one company print out prices for later use. |
| 33 | M 4/23 | Never optimal to exercise an American option early (Hull 9.5, p. 215) | HW 10: Hull p. 306: 13.4, 13.13. For each problem: (1) do by hand using the BS formula, then (2) using DerivaGem for analytic European options, and finally (3) using a binomial tree with 10 steps. Also use trees with 6 through 9 steps, but just write down the answers.) |
| - | - | Comparing market value of options with values obtained from the Black-Scholes formulas. | - |
| 34 | W 4/25 | Do real stocks follow the theorical model (geometric Brownian motion)? | HW 11 |
| - | - | - | Test II: handed out at end of class 4/25, due at beginning of class 4/30. On material through 4/18. |
| 35 | F 4/27 | Video: "The trillion dollar bet" (Long Term Capital Management) | Reading: Hull business snapshot p. 30; also Wiki reference. Also the book When Genius Failed, by Roger Lowenstein. |
| 36 | M 4/30 | Implied volatility (Hull 13.11, p. 300) and volatility smiles (16.3, p. 279) | HW 11: The price of options when they expire (due 5/4) |
| 37 | W 5/2 | Using trees to price American options (Hull 11.5, p. 250) | - |
| - | - | Boundary conditions for the Black-Scholes PDE | - |
| 38 | F 5/4 | Exotic options (Hull Ch 22) | - |
| - | - | Monte Carlo methods (Hull 17.6, p. 410) | - |
| 39 | M 5/7 | Demonstration: Monte Carlo evaluation of a call | Homework 12: Testing stock prices for geometric Brownian motion (due at the end of exams) |
| - | - | Summary of the course. Robustness of, and defects in the Black-Scholes model (handout) | - |
| - | - | - | Homework 13: Black-Scholes vs actual price, implied volatility, and volatility smiles (due at the end of exams) |
| - | - | - | HW 14: p. 262: 11.17 (Only part (b) is required, though it would be instructive to do part (a) first) |
| - | - | - | HW 15 (optional): p. 262, 11.18, 11.19. |
| - | - | - | HW 16 (optional): Use monte-carlo methods to do problems p. 306: 13.4, 13.13. Also compare your answers with the "analytic European" answers given by DerivaGem. They won't be exactly the same, but they should be approximately equal. You'll need the spreadsheet instructions for making it and also the instructions on how to use it. |