Course Notes and Topics

The Hull book contains much more information than we will go into in class, about the actual operation of futures and options markets, and about the use of futures and options in the world of finance. The course emphasizes mathematical aspects of the subject, and we do that in a bit more depth than Hull. Students are encouraged to read the background information, but doing so is optional (and indicated as such below). Students are responsible for what is covered in class (there is typically more detail given in the textbook).

- Optional reading: Background on forward and futures markets, chapters 1-3
- Optional reading: Review of interest and bonds (ie MATH 2280), chapter 4
- Forward contracts on stocks: Chapters 1.3, 5.1-5.5, 5.7
- Forwards on currency and commodities: Chapters 5.10-5.12
- Forwards on interest rates, and an example of an FRA settled in advance: Chapters 4.6-4.7, 7.1, and part of 7.6-7.7
- Futures contracts: Chapters 1.4, 2.1-2.4, 2.11, 5.8
- Examples: Types of contracts,
Canola contract:
Chapters 5.9-5.12, 6.1-6.3

Optional examples not covered this year: Index hedging, Bond hedging, Hedge calculations. Chapters 3.5, 6.4

- Types of options: Chapters 9.1-9.2, 11.2-11.5
- Optional reading: Background on options, chapters 9.3-9.12
- Qualitative properties of options: Chapter 10
- Pricing and Trees: Chapters 12.1, 12.3-12.4, 12.8-12.9

Spreadsheet for European Calls and Puts. (For problems you can use Hull's software, build your own in Excel, or modify my workbooks) - Risk neutral valuation: Chapter 12.2
- Calibration and the lognormal distribution: Chapters 12.6-12.7 and appendix
to Chapter 12, 14.1-14.4

Optional reading: Monte Carlo simulation, Chapter 20.6

Optional reading: Alternate calibrations, Chapter 20.4 - Dividends: Chapter 20.1 and 20.3
- Black-Scholes-Merton and spreadsheet: Chapters 14.7-14.9 and appendix to Chapter 14. Parts of Chapter 14.12
- American options and spreadsheet: Chapter 12.5 (and parts of Chapter 20 referred to above).
- Optional reading: Complete markets
- Option sensitivities: Chapter 18 (you are responsible for the definitions, and then for the formula for Delta and its application to hedging).
- Estimating volatility: Chapter 14.4
- Optional reading: Options on other assets
- Optional reading: Geometric Brownian motion and partial differential equations

- Forward contracts: Chapters 5.1-5.5, 5.7, 5.10-5.12
- Forward rate agreements and swaps: Chapters 4.6-4.7, 7.1, 7.6-7.7
- Futures contracts: Chapters 1.4, 2.1-2.4, 2.11, 5.8
- Options: Chapters 9.1-9.2, 11.2-11.5
- Qualitative properties: Chapter 10.

- Binomial trees: 12.1-12.4 and 12.8-12.9
- Lognormal models: 14.1-14.4 (through p. 303 only)
- Risk neutral valuation and BSM: 14.7-14.9 and Ch. 14 appendix
- Dividends and trees: 20.1 through p. 432
- Dividends and BSM: (see the notes)

Last year's second midterm, with solutions, is available here. Note that the topics weren't identical to the topics for our midterm, since it didn't come at exactly the same point in the term.

- American options in the binomial model: Chapters 12.5, 20.1
- Greeks. Computation of Delta, and Delta-hedging in the lognormal model: Chapter 18
- Estimating volatility: Chapter 14.4