The aim of this course is to present basic concepts and techniques necessary for derivative pricing and risk management.

Students should have basic knowledge of probability theory and capital markets

Altar, M, 2008, Inginerie Financiara, Editura ASE

Recommended books:

- Hull, J., 2006, Options, Futures, and other Derivatives, Prentice Hall
- Necula, C., 2009, Evaluarea optiunilor financiare. Volumul I - Modelul Black-Scholes-Merton, Editura ASE
- Stoica, G, 1999, Introducere in studiul miscarii browniene, Tipografia Universitatii Bucuresti
- Wilmott, P, Howison, S, and J. Dewynne, 1995, The Mathematics of Financial Derivatives. A student introduction, Cambridge U. Press

1. Basics

- continuous compounding
- the no-arbitrage principle
- risk neutral valuation principle
- the payoff function and the profit/loss function

2. Characteristics of Derivative Products

- forwards and the forward price
- futures and the futures price
- European options, CALL-PUT parity
- American options
- path dependent options
- swaps

3. Option Pricing using Binomial Trees

- one period binomial model for European options
- two period binomial model for European options
- binomial model for American oprions

5. Hedging using Derivative Products

- hedging using futures
- the Greeks
- static hedging using options: delta hedging, delta-gamma hedging
- dynamic hedging using options: delta hedging

6. Term Structure of Interest Rates

- zero-coupon bonds, zero rate
- the dymamics of the instantaneous interest rate
- coupon-bearing bonds, yield

7. Term Structure of Defaultable Bonds

- Merton structural model
- yield, spead and risk
- the probability of default

Course Materials