AØKK08370U Derivative Pricing (F)

Volume 2018/2019
Education

MSc programme in Economics – elective course

The course is part of the MSc programme in Economics-Financial line (symbolized by ‘F’).

 

Content

The course will give the student a solid foundation in both classical and modern aspects of option pricing and trading. We will start out by developing a thorough understanding of the notion of replication. Following this, we cover the famous Black-Scholes (1973) model which is the backbone of option pricing in practice still today. We then look at the model’s shortcomings and the presence of the so-called implied volatility smile. The volatility smile has been a main driver for the theoretical development in option pricing we have experienced over the past 30 years. We will look at modern extensions, e.g., stochastic volatility models, which have been proposed to address the vol smile. While option pricing theory is necessarily quite mathematical, the course will also try to develop the student’s intuitive understanding of the results. Furthermore, the course will consider several practical examples and assignments from especially fixed income, giving the student a feeling of how the theory comes to life on the trading floor.

 

A tentative list of topics that may be covered in the course:

  • Static and Dynamic Replication
  • The Black-Scholes Model
  • Options Hedging
  • The Volatility Smile
  • Trading Strategies
  • Local Volatility Models
  • Stochastic Volatility Models
  • Some Numerical Methods
  • Jump-Diffusion Models
Learning Outcome

After completing the course, the student should be able to:

Knowledge:

  • Describe and understand common options and the mechanics underlying them

  • Explain the terminology used in the industry

  • Explain the motivation behind different options and their use.

  • Explain the motivation behind different pricing models and their use.

  • Discuss hedging strategies

  • Discuss trading strategies

  • Discuss option pricing models

  • Discuss numerical methods for pricing models

 

Skills:

  • Calculate prices and quantify risk figures for common options using various models

  • Calibrate different pricing models to market data.

  • Evaluate the advantages and disadvantages of pricing models

  • Evaluate advantages and disadvantages of hedging strategies

  • Evaluate advantages and disadvanteages of trading strategies

  • Analyze option trades

  • Analyze hedging strategies

  • Analyze pricing models

 

Competencies:

  • Formulate and structure risks in terms of options/derivatives

  • Formulate and struture option pricing models

  • Develop and implement hedging strategies

  • Develop and implement trading strategies

  • Combine the theory of option pricing and empirical/practical implementation

The main reference is E.Derman & M.B. Miller, “The Volatility Smile” (2016). However, the course will also include various research papers.

The course is not intended to be an introductory course. Students are assumed to have prior knowledge of fixed income markets (mainly Bonds and Swaps) and basic contingent claim theory (e.g. from “Corporate Finance and Incentives” or “Pricing Financial Assets ”) at the level of the Hull textbook ("Options, futures, and other derivatives"). Finally, as the course is quite quantitatively demanding, students should at least have some interest in math and statistics.
Lectures, tutorials, and discussions of research papers
Schedule:
2 hours lectures 1 to 2 times a week from week 6 to 20 (except holidays).

Timetable and venue:
To see the time and location of lectures please press the link/links under "Se skema" (See schedule) at the right side of this page (F means Spring).

You can find the similar information in English at
https:/​/​skema.ku.dk/​ku1819/​uk/​module.htm
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F19; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Forår/Spring – Week 5-30”
Press: “ View Timetable”

The overall schema for the Master can be seen at KUnet:
MSc in Economics => "courses and teaching" => "Planning and overview" => "Your timetable"
KA i Økonomi => "Kurser og undervisning" => "Planlægning og overblik" => "Dit skema"
  • Category
  • Hours
  • Exam
  • 3
  • Lectures
  • 42
  • Preparation
  • 161
  • Total
  • 206
Credit
7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
The exam assignment is given in English and must be answered in English.
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Exam registration requirements

None

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Aid
Written aids allowed
Marking scale
7-point grading scale
Censorship form
No external censorship
The exam can be selected for external assessment.
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Exam period

Exam information:

The exam takes place at the computers of the university.

14 June 2019

 

From the middle of the semester the exact time will be available in Digital Exam portal.

 

Note: In special cases, the exam date can be changed to another day and time within the exam period.

 

More information about examination, rules, exam schedule: Master students (UK)  and Master students (DK).

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Re-exam

Reexam information:

The reexam takes place at the computers of the university:

13 August 2019

 

During the reexam period the exact time can be seen in Digital Exam.

 

Note: In special cases, the written reexam can change to another day within the reexam period. Or to an oral exam incl. date, time and place, if only a few students have registered the reexam. This will be informed by the Exam Office.

 

More info:  Master students (UK)  and  Master students (DK).

Criteria for exam assesment

Students are assessed on the extent to which they master the learning outcome for the course.

To receive the top grade, the student must with no or only a few minor weaknesses be able to demonstrate an excellent performance displaying a high level of command of all aspects of the relevant material and can make use of the knowledge, skills and competencies listed in the learning outcomes.