Lecture 2
Forwards and Futures
Positions
Having a POSITION on something means
your money depends on the price of that
asset
Have a position on McDonalds Stocks: Your
wealth changes by the price of McDonalds
stocks
Long Position
Short Position
Square

Lecture 4
Options Basics
What are Options?
Options are contracts that give the buyer the right
to buy or sell at some fixed price in the future
Example: Coupons stating the price of the product
Asymmetric payoff: The buyer can choose to buy
or sell at

Lecture 6
Black-Scholes Option Pricing
Black-Scholes vs. Binomial Trees
Binomial: Digital
Black-Scholes: Analogue
C
S
N
(
d
)
K
e
N
(
d
)
d2
T
1
r
T
0
1
2
2
ld1
n(S/K
)
(T
r2)T
The Black-Scholes Model
Where
C0 = the value of a European option at time t =

Lecture 5
Binomial Option Pricing
Expected Value
There is 30% chance that it will rain
tomorrow, and if it rains, you have to buy a
$20 umbrella
There is 70% chance that it will not rain
tomorrow, and if it does not, you will
harvest some oranges in you

Assignment 1
1. Create a binomial tree with 3 steps. The sample tree you got has 2 steps. For stock prices,
assume the current price is $25 and increase/decrease it by 15% by each step. This process is
also done in the sample tree, for 2 steps. Calculate

Quiz 1 Version A
1. All of the following were mentioned in the last lecture and are important habits for
passing this class EXCEPT:
1. annotating the syllabus
b. Which phrase, according to Lanham, might be written by a bureaucrat?
1. Bill and Marge are cu

Quiz 3 Version A
1. The Paramedic Method leaves out which TWO elements (circle two for two
points):
Time, circumstance
2. What is one way mentioned in class to persuade readers to believe your
message?
a. Be focused
3. Readers need to agree that your reas

Assignment 2
Use the uploaded Black-Scholes calculator for this assignment.
1. Current stock price is $100 and risk-free interest rate is 1.0%. Assume the volatility of the stock
will be 20% in the next month. What is the price of a call option that has a

Quiz 2 Version A
1. Richard Lanham believes rhythm
1. Is the most vital of proses vital life signs
b. What is wrong, according to Lanhams ideas, in the following sentence? An apple
seller approached the aspiring business student and heaped astounding
acco

Assignment 2
Use the uploaded Black-Scholes calculator for this assignment.
1. Current stock price is $100 and risk-free interest rate is 1.0%. Assume the volatility of the stock
will be 20% in the next month. What is the price of a call option that has a

Fall Midterm exam
Your Name:
Part A: 4 Questions
Evaluate the underlined statements with True, False, or Uncertain. Briefly explain your
answer.
1. When a trader is executing arbitrage transactions, the trader should assume that he or she
places limit ord

Practice Problems & Topics to Pay Extra Attention for Midterm
Topics in the exam:
Topic 1: Law of one price and arbitrage opportunity
Topic 2: Transaction costs and bid-ask spreads
Topic 3: Definition of forward/futures contracts
Topic 4: Forward contract

Practice Problems & Topics to Pay Extra Attention for Midterm
Topics in the exam:
Topic 1: Law of one price and arbitrage opportunity
Topic 2: Transaction costs and bid-ask spreads
Topic 3: Definition of forward/futures contracts
Topic 4: Forward contract

Lecture 1: Introduction
Derivatives
The assets whose prices depend on some
other stuff
Example of the stuff
Stock price
Bond price
Wheat price
Oil price
Temperature
World Series final game score
(Hypothetical) World Series
Example
Futures and opti

Lecture 5
Binomial Option Pricing
Expected Value
There is 30% chance that it will rain
tomorrow, and if it rains, you have to buy a
$20 umbrella
There is 70% chance that it will not rain
tomorrow, and if it does not, you will
harvest some oranges in you