This course provides a thorough and practical working knowledge of
options markets. It contains four parts: (1) the basic use and
properties of options; (2) the valuation models of options; (3) index
and futures options; (4) risk management of options. In the first part,
the course starts with various basic trading strategies and their
restrictions on options prices. Students get familiar with payoffs and
profits of various combinations of options contracts. It also teaches
the principle of no-arbitrage valuation in basic static trading
strategies. In the second part, the course builds the binomial and
continuous-time models. It teaches the principle of no-arbitrage in
dynamic trading strategies and introduces the principle of risk-neutral
valuation. The students will have a solid understanding of the binomial
tree and Black-Scholes formula for options valuation. In the third
part, the course has extensive discussion on index options and futures
options. It applies the no-arbitrage and risk-neutral principles to
develop valuation models for index and futures options. The course will
illustrate how futures and options may be used in portfolio management.
In the fourth part, students learn how to measure and manage the risk
of options. The so-called Greek letters are covered extensively and
students learn to build dynamic trading strategies for hedging banks'
short positions in options. Value at risk of portfolios containing
options will be discussed in the course. Although the course focuses on
business concepts and reasoning, the subject and thus the approach are
highly quantitative. Only highly motivated and quantitatively oriented
students should take the course. Besides B6302, the course requires the
basic knowledge of calculus, statistics and Microsoft Excel.
David L. and Elsie M. Dodd Professor of Finance
Professor Santos' research focuses on two distinct areas. A first interest is the field of asset pricing with a particular emphasis on theoretical and empirical models that can account for the predictability of returns, both in the time series and the cross section. A second interest of Professor Santos is applied economic theory, specifically, the economics of financial innovations as well as theory of...