Black-Scholes Pricing
The Black Scholes Pricing formula for call
options are given as
c S 0 N d1 Xe N d 2
rt
where,
d1
ln
S0
X
r t
2
t
2
ln S0 X r
d2
t
2
2
t d
1
t
Black-Scholes Pricing
Now consider a non-dividend paying stock
trading at $100 an

Review of Econometrics 1
Lecture Notes
June 14, 2009
1
Linear Regression as a Descriptive Tool
Given a set of n joint observations on k + 1 variables y, x1 , . . . , xk in tabular form:
y1
.
.
x11
.
.
.
.
x1k
.
.
yi
.
.
xi1
.
.
.
.
xik
.
.
yn
xn1
.
xnk
Th

Linear Regression and Correlation
We study the relationship between two variables, develop an equation linking the two and
help us estimate one variable from the other.
We often hear of questions like, is there a relationship between tuition fee increase

MANAGED, POOLED FUNDS
A mutual fund is a form of collective investment that pools money from many
investors and invests the money in stocks, bonds, short-term money market
instruments, and/or other securities in exchange for the shares of the
company that

FINANCIAL ENGINEERING
Financial engineering - bundling or unbundling of existing
assets or securities to create new ones with tailored or
different characteristics
Examples of financial engineering products:
Swaps, options, warrants, forwards, futures, as

Money Market
1. Suppose that the current Tbill rates are as follows:
91-days - 4.25%
182-days - 4.75%
364-days - 5.50%
Assume 364-day base year
a.If you will buy a 6-mo. Tbill right now, what would be its
price?
b.Suppose you bought the Tbill in (a). Afte

Option Sensitivites
Option prices can change due to directional
price shifts in the underlying asset, changes in
the implied volatility, time decay, and even
changes in interest rates. Each of these can
either help or hurt an investor depending on
the typ

SECURITIZATION
Securitization pooling loans for various purposes into
standardized securities backed by those loans, which
can be traded like any other security.
Is the process of restructuring and repackaging an
existing financial asset or a group of fin

Basic Probability Concepts
Random trial
An activity that has at least two outcomes and it is not known in advance which outcome
will occur
Basic outcome
The different possible outcomes of a random trial
Sample space
The set of all basic outcomes
Event
A s