2. FUTURES AND HEDGING
Reading
Luenberger, Chapter 10.1 - 10.4, 10.6, 10.7, 10.9,
10.10
NOTE: Standard reference for future reading: Hull,
J. C. (2011), Options, Futures and Other Derivatives,
8th edi
3.1
3. Optimal Hedge Ratios
Using Hull (2011) notation rather than Luenberger (1998)
S
F
S
F
change in spot price over life of hedge
change in futures price over life of hedge
standard deviation of S
4. Op&ons
Reading: Chapter 12, Chapter 11 of
Luenberger
1
4.1 Options types
A call is an option to buy
A put is an option to sell
A European option can be exercised only
at the end of i
6. PORTFOLIO THEORY
Reading: Luenberger Chapter 6
Consider a portfolio of n assets (e.g. stocks). A
portfolio is constructed by weighting asset i by weight
wi .Stock picking is accomplished by increa
7. Capital Asset Pricing MODEL
Reading: Luenberger Chapter 7
10/19/2011
1
Sharpe (1964), Lintner (1965)
Nobel Prize: Sharpe (1990)
Based on Mean Variance Portfolio Optimization
Rules for how to inve
9. UTILITY FUNCTIONS
Reading: Luenberger, Chapter 9
(Many of the slides in this lecture are modifications
from last years course by Professor Martin)
10/29/11
1
9.1 EXPECTED UTILITY FRAMEWORK
WO
W
U(w
5. Binomial Tree Model
Reading: Chapter 12, Chapter 11 of
Luenberger
1
5.1 A Toy Model That Could Later Be Made
Very Realistic
Suppose a stock is currently at price S.
In a later time t, it could mo
Derivation of Ordinary Linear Square
Estimators
A factor model for y i ( the subscript could denote time;
then it is a time series) :
y i = + xi + i
x i are the regressors (factors),
and and are the r