80712
tba
KMEC 964
Professor Stephen Figlewski
Phone: 2129980712
Email: sfiglews@stern.nyu.edu
Office: MEC 964
Office hours: TBA
MW, 9:30am to 10:45am
KMC 460
Final Exam:
Schedule exceptions
Class will not meet on:
Class will meet on:
Course description: This course is designed to introduce Finance students to the theoretical and practical aspects of financial futures, options, and other derivatives. Over the last 35 years, the markets for these versatile instruments have grown enormously and have generated a profusion of innovative products and ideas, not to mention periodic crises. Derivatives have become one of the most important tools of modern finance, from both the academic and the practical standpoint. However, the subject matter requires relatively greater use of quantitative methods and theoretical reasoning than many other courses, and most students will find it quite challenging.
All core courses. Some basic knowledge of futures and options is assumed.
THIS IS THE COURSE OUTLINE FROM FALL 2009, WHEN I LAST TAUGHT THIS COURSE. OBVIOUSLY, THE DATES ARE OFF, BUT THE TOPICS WILL BE NEARLY ENTIRELY WHAT YOU SEE BELOW. THE READINGS ARE FROM HULL'S TEXTBOOK(S). WE WILL BE USING (AS AN ALTERNATIVE TEXT) A NEW BOOK WRITTEN BY SUNDARAM AND DAS.
COURSE OUTLINE
Hdenotes chapters in the Hull textbook. bh denotes chapters in "Baby Hull."
Session / Date 
Topics 
Reading/ Homework 
1: Weds, Sep 9 
Course overview; Introduction to derivatives Fundamental derivatives concepts 
H1, H4 bh1, bh4 
2: Mon, Sep 14 
Forward contracts Hedging with forwards and with futures Futures contracts and futures markets 
H2 bh2 
3. Weds, Sep 16 
Hedging in the absence of basis risk Two key interest rate contracts "Dollar Equivalence" 
H3, H6 bh3, bh6 Homework #1 due 
4. Mon, Sep 21 
"Statistical" hedging Risk and return in a real world futures hedge Finding the minimum risk hedge using regression 

5. Weds, Sep 23 
Futures pricing: Expectations vs the Cost of Carry Arbitrage, the key to derivatives pricing 
H5 bh5 
6. Mon, Sep 28 
Doing cashfutures arbitrage, both long and short Inclass marketmaking exercisePart 1

Bring your calculator to class! Homework #23 due 
7. Weds, Sep 30 
Inclass marketmaking exercisePart 2 
Bring your calculator to class! 
8. Mon, Oct 5 
Stock index futures arbitrage Important stock index futures strategies 

9. Weds, Oct 7 
Tbond futures pricing; the cheapest to deliver bond Using interest rate futures 
Homework #4 due 
10.Mon, Oct 12 
Introduction to Swaps 
H7 bh7 
Session / Date 
Topics 
Reading/Homework 
11. Weds, Oct 14 
Introduction to Options 
H8, bh8 Homework #5 due 
12 Mon, Oct 19 
Analyzing option positions The covered call 
H10 bh10 
13. Weds, Oct 21 
Putcall parity Option price relationships from portfolio dominance 
H9 bh9 
14 Mon, Oct 26 
Extending putcall parity Option pricing: The Binomial Model 
H11 bh11 
15. Weds, Oct 28 
The Binomial Model, continued 
H19.1  H19.5 bh16 
16 Mon, Nov 2 
Option pricing: The BlackScholes Model 
H12, H13 bh12 
17. Weds, Nov 4 
Delta hedging and other Greek letters Inclass option hedging problems 
H17 bh15 Bring your calculator to class! Homework #6 due 
18 Mon, Nov 9 
Volatility The implied volatility smile and term structure 
H18, H21 bh17 
19 Weds, Nov 11 
Variations on a theme: Options on futures, FX, and interest rates 
H15, H16 bh13, bh14 Homework #7 due 
20. Mon, Nov16 
Stock index options Strategies for portfolio protection 

Session / Date 
Topics 
Reading/Homework 
21 Weds, Nov 18 
Caps, floors and other interest rate options Models for interest rate processes 
H28, H30 bh19 
22 Mon, Nov 23 
Caps, floors and other interest rate options Models for interest rate processes, continued 
H31 Homework #8 due 
23 Weds, Nov 25 
Mortgages and mortgagebacked securities Monte Carlosolution techniques 
H19.619.7 
24 Mon, Nov 30 
Credit risk and credit derivatives 
H22, H23 bh21 
25. Weds, Dec 2 
Credit risk and credit derivatives, continued 
Homework #9 due 
26. Mon, Dec 7 
Value at Risk Real options 
H20, H33 bh18, bh20 
27. Weds, Dec 9 
Exotic options Structured products Derivatives disasters 
H24, H34 bh20, bh23; excerpt from F.I.A.S.C.O. 
28. Mon, Dec14 
Overflow / Review 

Reading:
The material in this course is conceptually difficult, the pace is rapid and advanced concepts build quickly upon each other. Students should make sure they master the basics as they are presented, by reading the textbook, doing exercises, working with the TA, etc.i.e., whatever it takes. It is very helpful to do the reading before the class in which it will be discussed.
Textbook:
(H) Hull. Options, Futures, and Derivative Securities, 7th ed. PrenticeHall, 2008.
This textbook is the industry standard reference. It is "everything you might ever want to know about derivatives." It is hard reading, especially for nonmathematicians, but worth the effort. Learn everything in Hull, and you will have an outstanding grasp of the subject.
ALTERNATIVE TEXTBOOK: Hullhas a lower level version of his textbook, often known as "Baby Hull." It covers most of the same material, but with less mathematical rigor. You can use the lower level book, if you prefer.
(bh) Hull. Fundamentals of Futures and Options Markets, 6th ed. PrenticeHall, 2007.
Other required materials:
All class materials, including class notes, homework assignments, spreadsheets, sample problems and exams, will be available for downloading from the course website. Lecture notes and assignments will also be distributed in class.
Computer:
A working knowledge of Excel is a requirement for the course. Much of the homework will require use of a spreadsheet program. However, following Stern School standard policy, computers, Blackberries, smartphones, etc., are NOT permitted in class. They are too distractive, for the user and for others.
Calculator:
You will need a calculator for quizzes. It should be a "scientific" calculator, with x ^{y} and log functions, but nothing fancier than that is required. A calculator with more functionality than is needed costs less than $20.
Grading:
The typical grade distribution is: A, A 2535% ; B+, B, B 5565% ; C+ and below 515% This generally conforms to the Finance Department norm. The course grade will be based on demonstrated mastery of the material, not on how hard the student has worked.
Homework answers will be posted on the course website one week after an assignment is due. Late homework will not be accepted once the answers have been posted.
TA / Tutor / Grader: The TA for the course, <to be named later>, will hold regular office hours. Times and place will be announced.
At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter. In general, students in undergraduate core courses can expect a grading distribution where:
Note that while the School uses these ranges as a guide, the actual distribution for this course and your own grade will depend upon how well you actually perform in this course.
Attendance
Participation
Inclass contribution is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance.
You can excel in this area if you come to class on time and contribute to the course by:
Assignments
Classroom Norms
Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:
The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:
Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505
To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin. Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications. Additionally, your document will become part of the Turnitin database.
Your class may be recorded for educational purposes
If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 9984980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend. If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.
General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior. Students who fail to do so may be asked to leave the classroom.
Collaboration on Graded Assignments
Students may not work together on graded assignment unless the instructor gives express permission.
Course Evaluations
Course evaluations are important to us and to students who come after you. Please complete them thoughtfully.