Required Text: You should buy the following book:

As the class-notes are in overhead form, you will need the text. The class note modules all have cross-references to the appropriate sections of the Hull book.  It is also recommended that you keep up with the financial press.  The FT-US and WSJ are good daily sources.  The Wall Street Journal provides discount student subscriptions on a quarterly or a semester basis (click to access) -- as does the FT for students. Weekly sources include The Economist, Barron's, Business Week, Fortune, and Forbes.

Calculation: The course will require a significant amount of calculation and/or computer spreadsheet work. Please always bring your financial calculator to class.

Grading: A series of quizzes will be given at  two-three week intervals through out the semester and during the assigned final exam period.  A risk management project is also due before our final exam session, and a project work update is required at mid-module. The grade weight of the final project is equal to two quizzes.   The the first review quiz and the final exam period (project-related) quiz are both equal to 1/2 of a regular quiz. 

As this course concerns derivatives, you earn two grading options by taking the each quiz as scheduled: You will have the option to exclude one quiz from your final grade calculation. Additionally, you will have the option to redo one quiz question per quiz to earn back half of the points lost on the question.  The options are inclusive, i.e. you have both options.

There will be no quiz make-ups.  If, for some reason - like snow, a quiz must be canceled for the entire class, then the next quiz will count as a double quiz.

Quiz dates -
Our first quiz is during the third class period, Monday - 1/14. 
Monday - 1/28, Wednesday - 2/13, Monday - 3/31, Wednesday - 4/16.
The final session will be held in the scheduled “final exam” time.
(There is no exam in the final session, we wrap up and you hand in your projects.)

Finally, on all quizzes subsequent to the first one, you earn 90 quiz points for your work on the quiz. You earn the additional 10 points by attending and participating in class during the period leading up to a quiz.  If you do miss a class or have negative participation, then I will evaluate your excuse out of 3-5 points per class. Obviously, there will be a sign-up sheet handed out for each class, and I ask you to sit in the same seat through out the semester. 

There will be a series of required homework, from 1-3 per assignments per module. Homework will be distributed in class.  The homework is also available on the class web site, as are suggested homework answers.  Any homework that is unsatisfactory or missed will result in a 10 point penalty on the associated quiz. I require that all homework be turned in with the associated quiz.

Final class grades are curved in accordance with MSB policy.

Course Outline:

I recommend that you look over the sections in one of the following Hull books before the material is covered in class.

Options 6th: Hull, J., Options, Futures and Other Derivative Securities, 6th edition,
 Options 5th: Hull, J., Options, Futures and Other Derivative Securities, 5th edition
  or Options 4th: Hull, J., Options, Futures and Other Derivative Securities, 4th edition.

Class notes, quizzes and homework are in *.pdf or Adobe Acrobat form.  If these files don't load when you click on the hyperlink line, then click for Acrbobat download. Should you have trouble opening the "*.pdf" files, your browser may
require an adjustment that is described in this Word document.

Review: Time Value of Money and Interest Rates (if you have font problem - word doc format)
Options 6^th: 4.2-4.3 especially, 4.1-4.10, 6.1-6.2 (optional 6.5-6.6)
Options 5^th: pg. 42-44, 5.1-5.9, 5.13-5.15
Options 4^th: pg. 50-53, 4.1-4.9, 4.13-4.15
    Review with required answers: Time Value of Money and Interest Rates  
     (if you have font problem - word doc format)
   (Please focus on the first 20 pages of the handout.  Exercise 1) on page 17 is required, and 2) will
   provide extra practice.   The Raterevw.xls spreadsheet has an example of solutions.
   The appendix should help you better understand all of the concepts, but officially
   it is "optional, but highly recommended."  Prior to the quiz date, I'll be checking 
   voice- and e-mail, and will be in my office off and on.  To see background work, you
   may click to download an associated spreadsheet:  Intgrrte.xls .)

    Finally, an optional spreadsheet illustrates how to work off the benchmark Treasury
    yield curve (or term structure) to evaluate a risky project's cash flows by risk- and 
    time- adjusted DCF - Term_DCF_RP.xls.

Articles: Bond Funds Take on (High-Yield) Risk To Lift Returns            
             Muni (Upward Sloping Curve) Bonds Attract Arbs

Notation: Abbreviations and Symbols

1.  Forward and Futures Prices
Options 6^th:1.3, 5.3-5.7
Options 5^th:1.3, 3.4 - 3.8
Options 4^th:1.1, 3.1 (pp. 53-59) - 3.5

(These article links are not active.  Please email me should you want one prior to our opening the restricted site.)
Articles: Bernanke Cites a Rise in Risk Aversion (Premium)
             Newcrest to Buy Out Gold Hedges
             Amid Amaranth's Crisis, Other Players Profited            
             Kellogg Rides Resurgence           
             Kellogg Net Falls On Higher Costs For Commodities           
             Hedge Accounting Gets On Regulators' Radar            
             Morgan Stanley Trades Energy Old-Fashioned Way - In Barrels
             As Exchange Rates Swing, Carmakers Try to Duck
             OTC Derivatives Remain "Unregulated" and Single Stock Futures Approval
             As Fuel Prices Soar, Southwest Airlines Protects Itself by Hedging Fuel Costs
             Gold has lost its glitter. Is there a conspiracy afoot?
             A Case of Bordeaux for Your Portfolio?
             Enron how good an energy trader?
             A Mismanaged Palladium Stockpile Was Catalyst for Ford's Write-Off
             A contract on Saddam-Think the Iraqi leader's future isn't bright? Have we got an investment for you.

2.  Volatility Basics (Judgmental Volatility Information BW Surveys '99 and '00)
Options 6^th: 13.1-13.2, 13.4, 18.1, 19.1-19.2; optional 13.3, 13.11, 18.2-18.3, 19.3-19.6
Options 5^th: 12.1-12.2, 12.4, 16.1, 17.1-17.2; optional 12.3, 12.11-12.12, 16.2-16.3, 17.3-17.6
Options 4^th: 11.1-11.3, 14.1-14.2, 15.1-15.2; optional 15.3-15.7
Empirical Distribution vs. Normal Distribution Test with Sampled Mean and Standard Deviation

Links from here on are pretty much dead.  Please go to the restricted e-syllabus:
https://msb040.msb.edu/faculty/bodurthj/restricted/teaching/syllabus-mba.htm

To log in, the following should work,  Go to the url for the restricted site.
You may get a cert warning, but it’s fine. 

Choose accept permanently and click ok.

Next log in as usual on MSB intranet with NetID and “MSB” password:

You should be in the site, which has a sidebar to ease navigation.  Otherwise, content matches public site (except restricted site has article access under timely and first use conventions.)

Articles: 2007 Market Predictions and 2007 Consensus Investment Outlook and Predications (xls)
             Investors' Puzzle-Banks and Flat Yield Curve
             Volatility Expectations Tumble
          Investment banks change their spots
          Volatility Isn't What It Used to Be (It's Worse)
             Low volatility is pummeling traders of puts and calls
             Options' Fear Gauge Surges - S&P 100 Puts Put in Demand

3.  Market Benchmarked Expectations, Vol and Price Value @ Risk
Options 6^th: 5.14, 18.1, 18.6-18.8 and 18.summary; optional Chapter 3, 18.4-18.5 and 18.9
Options 5^th: 3.15, 16.1, 16.6-16.8 and 16.summary; optional Chapter 4, 16.4-16.5 and 16.9
Options 4^th: 3.12, 14.2, 14.7-14.9, 14.summary

Articles: CFTC Annual Report - 2004 (pdf)
             Insiders Get a Sturdy Tool to Rake in Stock Gains
             FASB Grows New Fangs - A new rule forces companies to shed light on their derivatives
             UK's Liffe Claims Strong Start To Universal Stock Futures
             Single-Stock Futures Ahead
             BusinessWeek Market Forecast Survey for 2002
             Around the world, equities have beaten bonds for the past century. Where's the risk in that?
                    (First Chapter and publisher)
             Enron's Fish Story - Was Mariner a "tool for earnings management?"

4.  Forwards and Futures
Options 6^th: 1.4, Chapter 2, 5.9-5.12; optional: 5.13- 5.14, 6.3-6.4, Chapter 7  (Not 5.Appendix proof)
Options 5^th: 1.4, Chapter 2, 3.9-3.12; optional: 3.13- 3.14, 5.10-5.12, Chapter 6  (Not Appendix 3A proof)
Options 4^th: 1.2, Chapter 2, 3.6-3.9; optional: 3.10- 3.11, 4.10-4.12  (Not Appendix 4A proof)

You should begin your project work (Module 11) with suggested assignments #I and, then, #1.
Example for S&P 500 December Maturity (SPZ7) pdf

5.  Option fundamentals: calls, puts, and underlying
Options 6^th: 1.5-1.7, Chapters 8 and 9
Options 5^th: 1.5-1.7, Chapters 7 and 8
Options 4^th: 1.3, 1.4, Chapters 6 and 7

Articles: Buffett Scores With Derivatives
             Stock Options: No Ifs, Calls, or Puts?
             Options Put Giants in a Jam
             LEAPs- Here's a Chance to Hop over Risk

6.  Option Positions and Strategies
Options 6^th: Chapter 10
Options 5^th: Chapter 9
Options 4^th: Chapter 8

Optional: Structured Bond Products (+B-C, etc.)
Options 6th: 298-300, 520-523, 540-541, 614
Options 5th: 249-250, 445-456, 511
Options 4th: 253-254, 469-470, 533-534, 646-648
Also see, Innovation in International Money and Bond Markets:  A Source of Lower Borrowing Costs?

Articles:  The More Hedges the Better, Right?

Resources: Delta-B Hedging Model to Risk-Neutral Probability Model Algebra
                  "Objective Probability Valuation-SFAS 133-IAS 39 Hedge_effectiveness"
                  Mathematics Encyclopedia - "The Greeks" (literally)
                  OPTSIMPL.XLS 30-step binomial Model
                     (Original "Bodurtha-Courtadon " FX and OTC Equity Wall Street Model)
                  Binomial Model Convergence to Black-Scholes Spreadsheet

9.  Implied Volatility
Options 6^th: 13.1, Chapter 16; optional Chapter 19
Options 5^th: 12.10-12.11, Chapter 15; optional Chapter 17
Options 4^th: 11.10-11.11, Chapter 17; optional Chapter 15

Investors Observe 'Implied Volatility' In Software Stocks
CBOE web option calculator (with implied vol applet)
S&P 500 futures vol "skew" - Optionsanalysis.com

10.&6bsp; Synthetic Options and the Cost of Insurance
         Risk Management - full text version
Options 6^th: Chapters 3 and 18
Options 5^th: Chapters 4 and 16
Options 4^th: Chapter 14

11.  Project Materials- Overview (pdf) (Group Listing)
WSJ and Web-based Information on futures and options markets
Project Assignment #1 (pdf), forecasts.org
Project Assignment-Web #2, (pdf intro) Risksmpl.xls spreadsheet, Riskmetrics log-in under revision, 
       British pound example with (example - some links have died) Riskmetrics detail under revision,
       and spreadsheet input form (pdf).  Equity indices are a bit different in working
      out exposure and adjustments, click for S&P example.
      Unfortunately, Riskmetrics does not cover many commodities.  
      Following Module 2 methods, you may use Bloomberg (example), 
     or calculate on your own from Ira Epstein & Company Futures Price Histories
      (coffee example help file).
Project Assignment #3 (pdf)

1) Browse to needed Riskmetrics area: http://www.riskmetrics.com/risk_management/risk_manager.html
   the cite that access has to be reset for (currently unavailable is http://www.riskmetrics.com/clients/risk/data/index.html)
2) Browse around to check out.  Need to set up data access from this site, but for now:
3) Click on the following link:  (see restricted syllabus)
4) Click appropriately to choose your underlying, then
    click Download subsets of Standard Dataset
5) Click monthly, volatility, list, 1 standard deviation, 
    View on-line, and click Download/view button.]

"Open format" Optposwk.xls project spreadsheet 
   (Be sure to save to your PC, and then run.
    Please do not run "open this file off its current location.")

Bloomberg Historical and Implied Volatility (HIVG) and Option Value (OMON, OCM) Screens

Imputing ITM put values from OTM calls and vice versa.
Mexican Peso Over-the-Counter Forward and Option Pricing (may be used for other European Priced FX)

Articles: Oil-Industry Watchers Differ On Their Forecasts for Prices
             Oil- Investors Have It Wrong
             Around the world, equities have beaten bonds for the past century. Where's the risk in that?

Risk Premium Estimation Sources

Announcements

Additional Suggested References -
Bodurtha, J. and Courtadon G., The Pricing of Foreign Currency Options, New York, Salomon Brothers Center, New York University, 1987-4/5.
Chance, D., An Introduction to Derivatives, New York, Dryden, 1998.
Cox, J. and M. Rubinstein, Options Markets, Englewood Cliffs, N.J., Prentice-Hall, 1985, ISBN 0136382053.
Figlewski, S., W. Silber and M. Subrahmanyam, Financial Options, : From Theory to Practice, Homewood, Illinois, Business One Irwin, 1990, ISBN 1556232349.
Jarrow, R.A. and A. Rudd, Option Pricing, Homewood, Illinois, Dow Jones-Irwin, 1983, ISBN 0870943782.
Jarrow, R.A. and S. Turnbull, Derivative Securities, Cincinnati, Ohio, South-Western, 1996.
McDonald, Derivatives Markets, Boston, MA, Addison-Wesley Publishing, 2002, ISBN: 0201729601
Rubinstein, Mark, In-the-Money, http://www.in-the-money.com/body.htm, hard copy is Rubinstein on Derivatives, London, Risk Books, ISBN 1899332537.
Stoll, H. and R. Whaley, Futures and Options: Theory and Applications, Cincinnati, Ohio, South-Western, 1993, ISBN 0538801158.

Derivatives Used in Practice -
Bookstaber, R.M., Option Pricing and Investment Strategies, Chicago, Probus, 1991, ISBN 1557381453.
Burghardt, Galen, The Eurodollar Futures and Options Handbook,  New York, McGraw-Hill, 2003, ISBN 0071418555.
Gastineau, G.L., The Stock Options Manual, 3rd edition, New York, McGraw-Hill, 1988, ISBN 0070229813.
Gatheral, Jim, The Volatility Surface: A Practitioner's Guide, Hoboken, Ny Finance, 2006, 9780471792512.
Kolb, R.W., Financial Derivatives, Miami, Kolb Publishing, 1993, ISBN 1878975188.
Kolb, R.W., Understanding Futures Markets, 3rd edition, Miami, Kolb Publishing, 1991, ISBN 187897503X.
McMillan, L.G., Options as a Strategic Investment, 3rd edition, New York, New York Institute of Finance, 1993, ISBN 0136360025.
Natenberg, S., Option Volatility and Pricing: Advanced Trading Techniques, 2nd edition, Chicago, Probus, 1994, ISBN 155738486X.
Schwarz, E.W., Financial Futures: Fundamentals, Strategies and Applications, Homewood, Illinois, Irwin, 1986, ISBN 0256030057.
Siegel, D.R. and D.F. Siegel, The Futures Markets, Chicago, Probus, 1990, ISBN 1557385726.
Smith, Jr., C.W. and C.W. Smithson, The Handbook of Financial Engineering, New York, Harper & Row, 1990, ISBN 0887304486.
Risk, From Black-Scholes to Black Holes, London, Risk, 1993, ISBN 0 9516453 31.
Taleb, Nassim, Dynamic Hedging: Managing Vanilla and Exotic Options, New York, Wiley, 1997, ISBN-10 0471152803, ISBN-13  978-0471152804.
Tompkins, R.G., Options Analysis, Chicago, Probus, 1994, ISBN 1557388342.

More technical -
Ingersoll, J., Theory of Financial Decision Making, Totowa, N.J., Rowman & Littlefield, 1987, ISBN 0847673596.
Shimko, D., Finance in Continuous Time: A Primer, Miami, Kolb Publishing, 1992, ISBN 1878975072.
Wilmott, Paul, J. Dewynne and S. Howison, Option Pricing: Mathematical Models and Computation, Oxford, Oxford Financial Press, 1993,   ISBN 0952208202.

PostScript