ECN/FIN 433
Dr. N. Richie
UNIT2OPTIONPAYOFFSANDOPTIONSTRATEGIES
Study Guide
1. Define the key terms of an options contract, including:
a. Call contract the gives (buyer, holder, long) right to buy underlying S at
prespecified price (strike price, exercise
ECN/FIN 433
Dr. N. Richie
UNIT8INTERESTRATESWAPS
Study Guide
1. Describe an interest rate swap contract.
a. Agreement to exchange cash flows over some period of time
2. Identify uses of swap contracts.
a. Agreement between 2 counterparties to exchange cas
UNIT4BLACKSCHOLESMERTONMODEL
1. Calculate the value of a call on a stock that pays a discrete dividend and a stock
that pays a continuous dividend.
a. Discreet Dividends (paid on known schedule)
a.i. Step 1: Add the present value of all dividends
a.ii. Su
ECN/FIN 433
Dr. N. Richie
UNIT1BASICSOFDERIVATIVESECURITIES
Study Guide
1. What is a derivative security?
a. An instrument with an underlying asset that drives value
2. What factors influence the value of a derivative security?
a. Strike price, call, mone
ECN/FIN 433
Dr. N. Richie
UNIT3BINOMIALOPTIONPRICINGMODEL
Study Guide
1. Describe the principal benefits of the binomial model.
a. Multiperiod model
b. Transparency
c. Ability to incorporate probabilities
2. Describe how the volatility of the underlying s
ECN/FIN 433
Dr. N. Richie
UNIT4BLACKSCHOLESMERTONMODEL
1. Identify the assumptions underlying the BSM model.
a. Options are European: only exercised at expiry
b. No dividends
c. No commissions
2. Calculate the value of a call and a put option using the BS
ECN/FIN 433
Dr. N. Richie
UNIT5FUTURESANDFORWARDSMARKETS
1. Describe the characteristics of forward contracts and futures contracts.
a. Long: contract to buy
b. Short: contract to sell
c. Payment at settlement
d. Small amount of cash up front
2. Compare o
ECN/FIN 433
Dr. N. Richie
UNIT6FORWARDPRICING
1. Compare the cost of carry model with the expectations model of futures.
a. S = Spot: for immediate delivery
b. Cost of Carry Model
b.i. F = S + costs benefits
c. Expectations model
c.i. If spot expected to
ECN/FIN 433
Dr. N. Richie
UNIT7HEDGINGWITHFUTURESANDFORWARDS
1. Calculate the basis and define basis risk.
i. if contango b0= negative F > S
ii. if backwardation b0 = positive F < S

Basis risk: risk that F does not converge as expected leadeing to loss
ECN/FIN 433
Dr. N. Richie
UNIT1BASICSOFDERIVATIVESECURITIES
Study Guide
1. What is a derivative security?
a. An instrument with an underlying asset that drives value
2. What factors influence the value of a derivative security?
a. Strike price, call, mone
Why have structured notes become so popular?
a. Structured notes allow the issuer of the note to tie the return of the note to
an underlying asset. This offers the potential for a greater return and
dependent on the conditions of the note, some downside p
Zoya Zimmerman
10/18/13
Extra Credit Assignment 2
Futures Markets
On October 31st, 2011 MF Global declared bankruptcy and began liquidating the
company. No reason has been proven and no one has been indited for the events that
took place. $1.2 Billion was
FIN/ECN 433
Dr. N. Richie
EXTRA CREDIT ASSIGNMENT #1
DEADLINE:
8:00 am, Monday, September 16
DELIVERY:
Blackboard attachment
VALUE:
A maximum of 3 percentage points added to Exam 1 grade
Watch the PBS movie, Trillion Dollar Bet. You can see the full trans
FIN/ECN 433
Dr. N. Richie
EXTRA CREDIT ASSIGNMENT #2
DEADLINE:
Wednesday, October 16 8:00AM
DELIVERY:
Blackboard attachment
VALUE:
A maximum of 3 percentage points added to Exam 2 grade
MF Global and Field Financial Group
Guest speaker, Mr. Gary Field
In
FIN/ECN 433
Dr. N. Richie
EXTRA CREDIT ASSIGNMENT #3
DEADLINE:
Friday, December 6 at 11:59 pm
DELIVERY:
Blackboard attachment
VALUE:
A maximum of 3 percentage points added to Final Exam grade
ECB Currency Swap with PBC
Based on the resources below, write
Zoya Zimmerman
ECN 433
Extra Credit Assignment 1
The documentary Trillion Dollar Bet follows the discovery of a mathematical formula
designed to eliminate risk in the stock market. The BlackScholes formula also referred to as the
Midas formula won the No
Zoya Zimmerman
11/24/13
ECN 433
Assignment 3 Interest Rate Swaps
Part 1
1. Harvard entered into the swap contracts to help lock in interest rates to fund a new
science center. The school was required to post collateral if interest rates fell. The
swaps we
FIN 433
Dr. N. Richie
ASSIGNMENT #1
Application of the BOPM and the BlackScholes Model
Due:
Delivery:
Monday, 30 September 2013
Assignment submission through Blackboard
Purpose:
1. Gather relevant financial data.
2. Build a financial model using Microsof
FIN 433
Dr. N. Richie
ASSIGNMENT #3
Interest Rate Swaps
Due:
Delivery:
8:00 am Wednesday, 4 December 2013
Assignment submission through Blackboard
Purpose:
1. Evaluate the swap market.
2. Gather data to price a plain vanilla interest rate swap at inceptio
Zoya Zimmerman
ECN 433
Dr. Nivine Richie
11/04/13
Assignment 2
1. MGRM offered stability risk to its customers by locking in oil at low prices for
extended periods of time. MGRM did not account for all the risks of its derivative
products, especially liqu
Zoya Zimmerman
11/25/13
ECN 433
Dr. Nivine Richie
Extra Credit Assignment #3
The European Central Bank (ECB) signed a threeyear bilateral agreement with
the Peoples Bank of China (PBC) to swap a maximum of
45 billion, the equivalent of
69.9 billion USD,