Course Detail

This course provides a thorough and practical working knowledge of options markets. It contains four parts: (1) the basic use and properties of options; (2) the valuation models of options; (3) index and futures options; (4) risk management of options. In the first part, the course starts with various basic trading strategies and their restrictions on options prices. Students get familiar with payoffs and profits of various combinations of options contracts. It also teaches the principle of no-arbitrage valuation in basic static trading strategies. In the second part, the course builds the binomial and continuous-time models. It teaches the principle of no-arbitrage in dynamic trading strategies and introduces the principle of risk-neutral valuation. The students will have a solid understanding of the binomial tree and Black-Scholes formula for options valuation. In the third part, the course has extensive discussion on index options and futures options. It applies the no-arbitrage and risk-neutral principles to develop valuation models for index and futures options. The course will illustrate how futures and options may be used in portfolio management. In the fourth part, students learn how to measure and manage the risk of options. The so-called Greek letters are covered extensively and students learn to build dynamic trading strategies for hedging banks' short positions in options. Value at risk of portfolios containing options will be discussed in the course. Although the course focuses on business concepts and reasoning, the subject and thus the approach are highly quantitative. Only highly motivated and quantitatively oriented students should take the course. Besides B6302, the course requires the basic knowledge of calculus, statistics and Microsoft Excel.