FE620 Pricing and Hedging



Course Catalog Description

Introduction

The course will give an introduction to the financial markets for equity, FX, interest rates, and credit products and derivative. 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.
Prerequisite(s): Basic concepts of probability and statistics, calculus. Knowledge of a programming language (R or Excel are preferred)


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
Beichen Zhang (B) - Teaching Assistant
bzhang61@stevens.edu

More Information

Course Outcomes

After successful completion of this course, students will:

Learning Goals:

  1. 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.
  2. Understand the risk-neutral approach to pricing derivatives, and be able to apply it to pricing forwards, futures and options.
  3. Be familiar with European and American options and their Greeks.
  4. Understand how to hedge the main risks of a financial derivative and of a portfolio of derivatives.

Course Format and Structure

This course is hybrid. The on-campus course will take place in a room to be communicated at a later date.
To access the course, please visit stevens.edu/canvas (http://stevens.edu/canvas) . For more information about course access or support, contact the TRAC by calling 201-380-6599 or 201-216-5500.

Course Logistics

  • The course will take place on Wednesdays 6:30-9:00pm on campus. The lecture will be broadcast on Zoom and will be recorded in Canvas for later viewing.
  • Assigments will be posted on Canvas shortly after the lecture and will be due on the Friday two weeks after

Instructor's Online Hours

I will be available via email and will respond as soon as I am available (generally within 24-48 hours).

Virtual Office Hours

Virtual Office Hours are a synchronous session (through Zoom) to discuss questions related to weekly readings and/or assignments. Office hours will be held Thursday from 1:00-3:00 pm EST. We can also have discussions at other times by appointment.

Online Etiquette Guidelines

Your instructor and fellow students wish to foster a safe online learning environment. All opinions and experiences, no matter how different or controversial they may be perceived, must be respected in the tolerant spirit of academic discourse. You are encouraged to comment, question, or critique an idea but you are not to attack an individual. Our differences, some of which are outlined in the University's inclusion statement below, will add richness to this learning experience. Please consider that sarcasm and humor can be misconstrued in online interactions and generate unintended disruptions. Working as a community of learners, we can build a polite and respectful course ambience. Please read the Netiquette rules for this course:

  • Do not dominate any discussion. Give other students the opportunity to join in the discussion.
  • Do not use offensive language. Present ideas appropriately.
  • Be cautious in using internet language. For example, do not capitalize all letters since this suggests shouting.
  • Avoid using vernacular and/or slang language. This could possibly lead to misinterpretation.
  • Keep an open mind and be willing to express even your minority opinion.
  • Think and edit before you push the “Send” button.
  • Do not hesitate to ask for feedback.


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

Assignments: Assignments will be provided throughout the semester, consisting of problems related to the material taught in the lectures. They are to be handed in on time. No late assignments, without prior approval, will be accepted. There is a project for the course and a final exam. The total grade is a weighted average of the attendance, assignments, project and final exam.

Participation (this is automatic for WS students) - 5%

Assignments - 35%

Project - 30%

Final Exam - 30%

Preliminary Grading Scheme:

A : 93%-100%

A- : 90%-93%

B+ : 87%-90%

B : 83%-87%

B- : 80%-83%

C+ : 77%-80%

C : 73%-77%

C- : 70%-73%

D+ : 67%-70%

D : 65%-67%

F : 0%-65%

This grading scheme is subject to change based on student outcomes. It may be curved more leniently. It will not be made more difficult.


Lecture Outline

Topic Reading Assignments
Week 1 - 3 Feb Introduction to financial markets and derivatives Chapter 1
Week 2 - 10 Feb Interest rates and bonds Chapters 4.1-4.11 HW1 Posted
(due 26 feb)
Week 3 - 17 Feb Default and Credit Risk
Credit Default Swaps
Chapters 24.1-24.5 and 25.1-25.2
Week 4 - 24 Feb Swaps and FX
Interest rates and cross currency swaps
Chapter 7 HW1 Due 26 Feb
HW2 Posted
(due 12 Mar)
Week 5 - 3 Mar Futures and forward Chapters 5-6 Team Formation (Due 5 Mar)
Week 6 - 10 Mar Options: General properties Put-Call parity Chapter 10,11 HW2 Due 12 Mar
HW3 Posted
(due 26 Mar)
Week 7 - 17 Mar Option Pricing - Discrete time Binomial tree, risk neutral pricing Chapter 13
Week 8 - 24 Mar Option pricing - Continous time Brownion Motion, geometric BM, Black-Scholes Model Chapter 14,15 HW4 due 9 Apr HW5 Posted (due 23 Apr)
Week 9 - 31 Mar Greeks Chapter 19,20
Week 10 - 7 Apr Basic numerical procedures Trees, MC, PDEs Chapter 21 HW4 due 9 Apr HW5 posted (due 23 Apr)
Week 11 - 14 Apr Incomplete Markets Chapter 22
Week 12 - 21 Apr Perpetual Derivatives. Derivatives regulation Chapter 37 HW5 Due 23 Apr
Week 13 - 28 Apr Project Work
Week 14 - 5 May Project presentations Project due 5 May


2020 Fall FE620 Pricing and Hedging