Course syllabus

The course Options and Mathematics deals with the arbitrage-free valuation of stock options, and other financial derivatives, using both theoretical and numerical tools. It is intended as a first course in financial mathematics, for which in particular no previous knowledge in finance is required.

More information on the aim and learning outcomes of the course can be found in the course plan (Links to an external site.).

Course Responsible

Maria Roginskaya. E-mail: maria.roginskaya@chalmers.se

Important. I answer e-mails with up to 4 working days delay.

Carl Lindberg is responsible for MatLab project.

Student representatives

The following students have been appointed:

GU:

Sebastian Persson

Joel Dalebj√∂rk 

Chalmers:

Jacob Burman

Tharinrath Jatupattrapiboorn

Maria Jidah

Danai Kiewwan

Meixi Lin

News

 

Literature

Simone Calogero: A first course in Options Pricing Theory

 

Program

The schedule of the course is in TimeEdit.

 

Preliminary program of lectures

Lectures
Day Time Sections Content

30 Oct

KC

10.15

 

1.1-2 (pp.1-5, 15)

Basic financial concepts.

Examples of financial assets. Stocks and bonds.

Portfolio. Long and short positions.

1 Nov

HC3

13.15

 

1.2-5

 

Returns. Historical volatility.  

Options. European/American financial derivatives. Calls/puts and non-standard.

Forwards, futures, and swaps.

Money market.

2 Nov

Pascal

13.15

 

1.6, 2.1

 

Frictionless markets.

Arbitrage-free principle.

Price of risk.

6 Nov

SB-H4

10.00 2.2

Qualitative properties of options.

Put-call parity. Theorem 2.3.

Some of exercises 1.1-2.23.


 

8 Nov

Pascal

13.15

2.3

Optimal exercise of American options.

Description of bonus project.

Definition 2.5, Definition 2.6 

Some of exercises 2.24-2.36

9 Nov

Pascal

13.15 3.1-3

Binomial markets.  Log-return and volatility.

Predictable portfolio. 

Self-financing portfolio. 

Exercise 3.41

10 Nov

Pascal

8.30

review so far

Some of Exercises 3.37-43

13 Nov

SB-H4

10.00 3.4-5  

Portfolio generating a cash flow.

Arbitrage portfolio.

Exercises 44, 45

15 Nov

Pascal

13.15

4.1-2

Hedging/replicating portfolio

Definition 4.1. Definition 4.3

Replicating portfolio of European derivatives on binomial markets.

Theorem 4.10.

Some of exercises 46-58

16 Nov

Pascal

13.15 5.1-2

Binomial price of American derivatives.

Optimal exercise of American put options.

Optimal exercise curve in binimial model

17 Nov

Pascal

8.30 Exercises 74 and 90

20 Nov

SB-H5

10.00 5.3

Replicating portfolio of American derivatives. Cash flow.

Exercises 64-86

22 Nov

Pascal

13.15

3.6, 4.3, 5.4

Computation of the binomial price of European/American derivatives

with Python.

Summary so far

23 Nov

Pascal

13.15 6.1

Finite probability spaces. Random variables. Independence 

Expectation and conditional expectation.

24 Nov

Pascal

8.30

Exercises 113 and 116

27 Nov

SB-H4

10.00 6

Stochastic processes.

Martingales

Applications of probability theory to the binomial model

Theorems 6.36, 6.42

29 Nov

Pascal

13.15

6.2 (pp.137-138)

8 (pp.165-180)

Risk-neutral price of American derivatives Definition 6.44 

General probability spaces. Brownian motion. 

30 Nov

Pascal

13.15 8.1-2 (pp.180-188)

Girsanov theorem. Black-Scholes markets.

Definition 8.19,

1 Dec

Pascal

8.30 Exercises 122 and 193

4 Dec

SB-H4

10.00 8.3-4 (pp.188-194)

Theorem 8.20

Black-Scholes price of standard European derivatives. Definition 8.23, Theorem 8.24

6 Dec

Pascal

13.15

8.4-5 (pp.194-199)

Black-Scholes price of European call and put options. Theorem 8.25

Greeks. Implied volatility. Definition 8.30.

Implied volatility curves.

7 Dec

Pascal

13.15 8.7

 The Asian option. Monte Carlo method.

8 Dec

Pascal

8.30 Some of exercises of Chapter 8

11 Dec

SB-H4

10.00 8.8

Standard European derivatives on a dividend paying stock.

Theorem 8.34

 

13 Dec

Pascal

13.15

Review, summary so far

14 Dec

Pascal

13.15 8.10

Introduction to bonds valuation. Definition 8.40.

 

15 Dec

8.30

Old exams

 

 

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Matlab projekt

Examination

The final test comprises 30 points and the Matlab project gives max 2 more bonus points.  The least number of points to pass the course is 15.

  • at GU a result greater than or equal to 23 points is graded VG;
  • at Chalmers a result greater than or equal to 20 points and smaller than 25 points is graded 4 and a result greater than or equal to 25 points is graded 5.

The test is divided in two parts:

The first part will be of theoretical nature and will require to state and prove two of the following theorems in the lecture notes (max. 3 points for each theorem):

  • Theorem 2.3(1.2) , Theorem 3.16 (2.1),  Theorem 3.17 (2.2), Theorem 3.23 (2.4) (Step 1: the one-period model), Theorem 4.10 (3.3), Theorem 6.36 (5.5),  Theorem 8.20 (6.10), Theorem 8.25 (6.14), Theorem 8.34 (6.18)

to provide and explain one of the following definitions (max. 3 points):

  • Definition of arbitrage: either 2.1 (1.2) or the one given at lecture, Definition 2.6 (1.3), Definition of annualized min of log-returns and volatility as given by formula 3.3 (2.1), Definition of self-financing portfolio process 3.13 (2.6), Definition 3.22 (2.8), Definition 4.1 (3.1), Definition 4.3 (3.2), Definition 6.44 (5.19), Definition 8.19 (6.7), Definition 8.23 (6.8), Definition 8.30 (6.9), Definition 8.40 (6.10)

and to answer a critical thinking question similar to one of those marked with the symbol (?) in the book (max. 3 points). 

The second part of the exam consists of 3 exercises (max. 18 points).

Remarks:
(i) If in the exam it is asked to prove theorem X and the proof requires the result of theorem Y, you don't need to prove also Y.
(ii) When asked to prove one of the above theorems, the question does not necessarily contain the exact statement as it appears in the lecture notes. For instance, a question asking to prove Theorem 6.14 could read like "Derive the Black-Scholes price of European call options".
(iii) The explanation of the definition need not be the same as in the lecture notes. You can use your own intuition. If the definition involves a mathematical formula, e.g., eq. (6.13) in Definition 6.7, then you have to explain the meaning of all mathematical symbols in this formula. You must also explain the financial meaning of the definition.

The dates and times for the exams can be found in the student portal (Links to an external site.).

Old exams

Suggested solution to examen 2023.

Suggested solution to first re-examination 2023.

Suggested solution to second re-examination 2023.

Examination procedures

In Chalmers Student Portal (Links to an external site.) you can read about when exams are given and what rules apply to exams at Chalmers. In addition to that, there is a schedule (Links to an external site.) when exams are given for courses at the University of Gothenburg.

Before the exam, it is important that you sign up for the examination. You sign up through Ladok (Links to an external site.)

At the exam, you should be able to show valid identification.

After the exam has been graded, you can see your results in Ladok.

At the annual (regular) examination: 
When it is practical, a separate review is arranged. The date of the review will be announced here on the course homepage. Anyone who can not participate in the review may thereafter retrieve and review their exam at the Mathematical Sciences Student office (Links to an external site.). Check that you have the right grades and score. Any complaints about the marking must be submitted in writing at the office, where there is a form to fill out.

At re-examination: 
Exams are reviewed and retrieved at the Mathematical Sciences Student office (Links to an external site.). Check that you have the right grades and score. Any complaints about the marking must be submitted in writing at the office, where there is a form to fill out.

Course evaluation

At the beginning of the course, at least two student representatives should have been appointed to carry out the course evaluation together with the teachers. The evaluation takes place through conversations between teachers and student representatives during the course and at a meeting after the end of the course when the survey result is discussed and a report is written. 

Guidelines for Course evaluation (Links to an external site.) in Chalmers student portal.

 

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