Mat-2.194 Summer School on Systems Sciences

Financial Engineering

Lecturer

Assistant Professor Jussi Keppo from Michigan University

Email: keppo@umich.edu

Teaching Assistant

Erkka Näsäkkälä

Email: erkka.nasakkala@hut.fi

Outline

The main objectives of the course:

- Provide the students with a thorough understanding of the theory of pricing derivatives in the absence of arbitrage
- Develop the mathematical and numerical tools necessary to calculate derivative security prices

We begin by exploring the implications of the absence of static arbitrage. We study, for instance, forward and futures contracts. We proceed to develop the implications of no arbitrage in dynamic trading models: the binomial and Black-Scholes models. The theory is applied to hedging and risk management.

Preliminary knowledge

The students should be familiar with the fundamentals of probability theory and investment analysis.

Grading

Exam 60%, homework 40%.

Grades of the courseCourse Material

Hull, J.C.: Options, Futures, and Other Derivative Securities, 1999, Prentice-Hall.

Homework Problems

During the help sessions the students will solve problems under the guidance of Teaching Assistant. The students will be given homework problems after each help session. The homework problems must be handed in before the start of next lecture. The homework problems must be solved independently and they will be graded.

Homework 1 Homework 2 Homework 3Preliminary Schedule

All the lectures will be held in the classroom Y427B

**Lecture 1** 28.5 14-16

**Help Session **28.5 16-18

**Lecture 2**(HW1 Due) 29.5 14-17

**Lecture 3** 30.5 14-16

**Help Session 2** 30.5 16-18

**Lecture 4** (HW2 Due) 31.5 14-16

**Help Session 3** 31.5 16-18

**Lecture 5 **(HW3 DUE) 1.6 14-16

**Take home Exam**

Exam will be available here 3.6.2001 at 18.00. Exam will also be emailed to course participants.

Exam must be handed in 4.6.2001 at 18.00 eihter by email or by returning a paper version to a paper bag at Systems Analysis Laboratory (near by U241)