FE620 Pricing and Hedging



Course Catalog Description

Introduction

The course will give an introduction to the financial markets for equity, FX, interest rates, commodities and credit, and their derivatives.The course will focus on the valuation and risks of the main traded products, introducing the risk neutral pricing approach for derivatives valuation and hedging.


Campus Fall Spring Summer
On Campus X X
Web Campus X X X

Instructors

Professor Email Office
Dan Pirjol (A,WS)
dpirjol@stevens.edu Babbio 303a

More Information

Course Outcomes

After successful completion of this course, students will:

  • Be familiar with the concepts of yield curve, credit risk, currency exchange rates, and with the main contracts linked to the interest rates, FX and credit traded in markets.
  • Understand the risk-neutral approach to pricing derivatives, and be able to apply it to pricing forwards, futures and options.
  • Be familiar with European and American options and their Greeks.
  • Understand how to hedge the main risks of a financial derivative and of a portfolio of derivatives.

Course Resources

Textbook

John Hull, Options, Futures and Other Derivatives. 10th Edition, Pearson.

Additional References

Sections from the required text, as indicated for each class.

Additional Readings: Additional readings will be provided, as needed.


Grading

Grading Policies

Weights
1 Class Participation 5%
2 Homework 35%
3 Project 30%
4 Exam 30%

Lecture Outline

Topic Reading Assignments
Week 1 Class logistics and introduction to financial markets Ch. 1
Week 2 Interest rates and bonds Ch. 4.1 - 4.11 HW1 Posted
(due Sep 30)
Week 3 Swaps and FX
Interest rate and cross currency swaps
Ch. 7
Week 4 Future and forwards Ch. 5,6 HW1 Due, HW2 Posted
(due Oct 14)
Week 5 Default and credit risk
Credit default swaps
Ch. 24.1-24.5
Ch. 25.1-25.2
Team formation
Oct 7
Week 6 Options: General properties
Put call parity
Ch. 10,11 Hw2 Due, Hw3 posted
(due Oct 28)
Week 7 option pricing - discrete time, Binomial tree, risk neutral pricing Ch. 13
Week 8 Option Pricing - Continous time, Brownion motion, geometric BM, Black Scholes Model Ch. 14, 15 Hw3 Due Oct 28
Hw 4 Posted
Proj. Proposal Due Oct 28
Week 9 Greeks: Δ, Γ Ch. 19,20
Week 10 Basic Numerical Procedures, Trees, MC, PDEs Ch. 21 HW4 due Nov 11
HW5 posted
(due Dec 2)
Week 11 Incomplete markets and risk measurement Ch. 22
Week 12 Commodities Ch. 35 Hw5 due Due 2
Week 13 Project Work
Week 14 Project Presentations Project due Dec 16