AD 466 – Introduction to Financial Derivatives
Spring 2016
Course Overview
Classroom
An introduction to pricing, trading and hedging of financial derivatives such as
futures, options, and swaps. Topics include stochastic modeling of the financial
markets; concept of arbitrage; valuation of financial derivatives; Black-Scholes
model; trading strategies; hedging techniques; volatility smile and exotic options.
The course will cover the applications of basic numerical procedures in pricing and
risk management. The practical use of financial derivatives in portfolio and risk
management will be addressed through lectures, guest speakers and case study
discussions. The course objective is to familiarize students with the economic use of
derivatives and introduce required technical understanding.
IB 312
Required Text
Email
One of the following textbooks
 Options, Futures, and Other Derivatives (8th edition), John C. Hull
 An Introduction to Derivative Securities, Jarrow and Chatterjea
The Wall Street Journal, Financial Times.
Instructor
Cenk C. KARAHAN
Class Meeting Time
Wednesdays 3 – 6 pm
cenk.karahan@boun.edu.tr
Office Location
IB 305
Office Hours
Wednesdays 1 – 3 pm
or by appointment
Teaching Assistant
Merve Gizem
CEVHEROĞLU
mgcevheroglu@gmail.com
Grading
 Homework and Quizzes (15%) – Four-five sets of problems and occasional pop
quizzes will determine part of your grade.
 Case Study Reports (20%) – Brief written analyses of two case studies and
contribution to in-class discussions.
 Midterm (25%) – In-class midterm roughly around the first week of April.
 Final (40%) – In-class final exam per university mandated schedule.
 Attendance is mandatory. Missing more than 3 classes with or without excuse will
result in a failing grade.
 You need a calculator for general in-class use and exams. You are also expected to
be fairly comfortable with Excel for computations.
Course Contents
Below is a tentative outline of the topics that will be covered throughout the
semester.
 Introduction to Derivative Instruments and Mathematical Review (1 week)
An introduction to derivatives the associated markets. Review of probability
concepts, expectation, variance, covariance, and normal random variables.
 Futures and Forwards (2 week)
Determination of prices, hedging, interest rate futures, futures options
 Arbitrage Theory and Trading Options (1 week)
The concept of arbitrage, no-arbitrage pricing of option and forwards, put-call
parity.
 Binomial Trees (1 weeks)
Pricing options in a single period model, multi-period models and American
options.
 Black-Scholes-Merton Model (2 weeks)
Geometric Brownian Motion, Black-Scholes model and pricing formula.
 Hedging (1 week)
Hedging options, delta hedging, Greeks, hedging portfolio risk, Value-at-Risk.
 Numerical Methods (2 week)
Estimating volatilities, volatility smiles, Monte-Carlo simulation, variance
reduction, pricing exotic options.
 Swaps and Other Topics (1 week)
Time permitting we will touch on swaps and more advanced topics on derivatives.