Latest news
Welcome to the course.
The schedule for the course can be found via the link to webTimeEdit top of the
page.
10/24: Lecture notes added, see Course literature
11/08: Hints to recommended exercises for Chapter1 added (see here)
11/09: MATLAB project added (see here)
11/20: Examination information added
11/20: More past exams papers added
11/27: Modified Matlab codes added (see here)
12/07: OBS! There is an error for Friday 08/12 class on TimeEdit. It is stated there that it is a problem class (lektion), however it will be a lecture (föreläsning). Also note that the location is not Pascal, but KA. Don't get lost!
Teachers
Course coordinator: Alexandr Usachev
(usachev@chalmers.se) I reply to emails from Monday to
Friday 9 am  5 pm
Office hours: Monday 15.1517.00, Thursday
15.1517.00. Come to my office (MVL2126) with your questions
Teaching assistant: Anna Persson (peanna@chalmers.se)
Course representatives:
MPENM adityab@student.chalmers.se ADITYA BHADRAVATHI SRIDHARA
MPENM rigon@student.chalmers.se RIGON DEMISAI
TKIEK theeli@student.chalmers.se THEODOR ELIASSON
TKIEK hardigj@student.chalmers.se JOHAN HÄRDIG
TKTEM erikasa@student.chalmers.se ERIKA SALOMONSSON
Course literature
Lecture notes: Introduction to options pricing theory (pdf)
Program
The time and place of the lectures can be found here.
Lectures
Day  Chapter 
Contents 

31 Oct 
1.1 
Basic financial concepts.
Long and short position. Portfolio. 
1 Nov 
1.1 
Historical volatility.
Options. European/American financial derivatives. 
2 Nov 
1.1 
Money market. Frictionless
markets. 


7 Nov  1.2  Qualitative properties of option prices. Putcall parity. Optimal exercise of American put options. 
8 Nov  2.1, 2.2  Binomial markets. Selffinancing portfolio 
9 Nov Anna 
Proof of Th. 1.1 and Th.
1.2. Exercises 1.8, 1.9 

10 Nov 
2.3 
Arbitrage portfolio.
Arbitragefree binomial markets. 
14 Nov  3.1  Binomial price of European derivatives. 
15 Nov  3.2  Hedging portfolio of European derivatives on binomial markets. 
16 Nov Anna 
Proof of Th. 3.1. Exercises 3.2, 3.3  
17 Nov  4.1, 4.2, 4.3  Binomial price of American derivatives. Optimal exercise time of American put options. 


21 Nov  4.4  Hedging portfolio of American derivatives. Cash flow. 
22 Nov  2.4, 3.3, 4.5  Computation of the binomial price of European/American derivatives with Matlab. 
23 Nov Anna 
Exercise 3.7. Proof of Th. 4.1. Exercise 4.4  
24 Nov  5.1, 5.2  Finite probability spaces. Random variables. Independence. 


28 Nov  5.2, 5.3  Expectation and conditional expectation. Stochastic processes. Martingales. 
29 Nov  5.4  Applications of probability theory to the binomial model 
30 Nov Anna 
Exercises 5.9, 5.11, 5.12, 5.17  
1 Dec  5.5  General probability spaces. Central limit theorem. Brownian motion. 
5 Dec  6.1  BlackScholes markets. 
6 Dec  6.2, 6.3  BlackScholes price of European derivatives. Hedging portfolio. BlackScholes price and hedging portfolio of European call and put options 
7 Dec Anna 
Proof of Theorem 5.7(ii), Exercises 5.19, 5.20, 5.27  
8 Dec  6.4, 6.5, 6.6  BlackScholes price of binary options. Implied volatility. Standard European derivatives on a dividend paying stock 
12 Dec  6.7  Optimal exercise time of American calls on a dividend paying stock. 
13 Dec  Review  
14 Dec Anna 
Review old exams  
15 Dec Anna 
Review old exams 
Recommended exercises
The recommended exercises are those marked with the symbol (●) or (☆) in the lecture notes, plus the following from
Appendix D:
Chapter 1: 1, 3, 5, 6 HINTS
Chapter 3: 1, 2, 3, 4, 6
Chapter 4: 1, 2, 3
Chapter 5: 1, 2
Chapter 6: 1, 2, 3, 4, 5, 6
Computer labs
Reference literature:
Learning MATLAB, Tobin A. Driscoll ISBN:
9780898716832 (The book is published by SIAM).
Modified Matlab codes:
European derivatives (see here)
American derivatives (see here)
How to use the function argument (see here)
Course requirements
The learning goals of the course can be found in the course plan.
Assignments
Matlab project (pdf)
The deadline for the submission of the report is December, 15th.
The results will be announced the week thereafter.
Remarks:
(1) The Matlab project is NOT compulsary.
(2) The bonus points of the Matlab project count for the exam in
January and the two following reexams.
(3) Note that each option in the project has many different
variants (e.g.,compound options exist as call on call, call on
put, etc.). While you should describe all possible variants, for
the numerical part you can focus on one example for each option.
(4) Attach only the most relevant Matlab codes (e.g., the Matlab
functions to compute the price). In particular, DO NOT attach the Matlab scripts
used to create the plots
(5) The main part of the project is the Matlab code and the
pictures. As far as the theoretical evaluation you can simply
list the different approaches used in the literature and give
some reference to where details can be found. If there exists an
exact formula, you can write it in your report. Moreover you
could give an example with the binomial model for N=2 or 3...
this is really up to you! As I ask you to write no more than 5
pages for each option (including the Matlab code and the
figures), you really can't write much.
Examination
The exam is on January
12th, 2018
The test comprises 15 points and to pass at least 6 points are
required
 at GU a result greater than or equal to 11 points is graded
VG;
 at Chalmers a result greater than or equal to 9 points
and smaller than12 points is graded 4 and a result greater than
or equal to 12 points is graded 5.
The Matlab project gives max 1 point
The test is divided in three parts, each one giving a maximum of
5 points.
One part will be of theoretical nature and will require to state
and prove one or more of the following theorems in the lecture
notes (max. 4 points) :
Theorem 1.2, Theorem 2.2, Theorem 2.3, Theorem 3.3, Theorem 4.3,
Theorem 5.4, Theorem 5.5, Theorem 6.1, Theorem 6.2, Theorem 6.3,
Theorem 6.5, Theorem 6.6, Theorem 6.9
and to provide and explain one of the following definitions in
the lecture notes (max. 1 point):
Definition 1.1, Definition 2.3, Definition 2.4, Definition 3.1,
Definition 3.2,Definition 3.3, Definition 4.1, Definition 4.2,
Definition 4.3, Definition 5.15, Definition 6.1, Definition 6.2
Remarks:
(i) If in the exam it is asked to prove theorem X and the proof
requires the result of theorem Y, you don't need to prove also
Y.
(ii) When asked to prove one of the above theorems, the question
does not necessarily contain the exact statement as it appears
in the lecture notes. For instance, a question asking to prove
theorem 6.5 could read like "Derive the BlackScholes price of
European call options".
(iii) The explanation of the definition need not be the same as
in the lecture notes. You can use your own intuition.
Examination procedures
In Chalmers Student Portal you can read about when exams are given and what rules apply on exams at Chalmers. In addition to that, there is a schedule when exams are given for courses at University of Gothenburg.
Before the exam, it is important that you sign up for the
examination. If you study at Chalmers, you will do this by the
Chalmers Student Portal, and if you study at University of
Gothenburg, you sign up via GU's
Student Portal.
At the exam, you should be able to show valid identification.
After the exam has been graded, you can see your results in Ladok by logging on to your Student portal.
At the annual (regular) examination:
When it is practical, a separate review is arranged. The date of
the review will be announced here on the course homepage. Anyone
who can not participate in the review may thereafter retrieve
and review their exam at the Mathematical
Sciences Student office. Check that you have the right
grades and score. Any complaints about the marking must be
submitted in writing at the office, where there is a form to
fill out.
At reexamination:
Exams are reviewed and retrieved at the Mathematical
Sciences Student office. Check that you have the right
grades and score. Any complaints about the marking must be
submitted in writing at the office, where there is a form to
fill out.
Old exams
January 2017 (pdf) April 2017 (pdf) August 2017 (pdf)
April 2016 (pdf) June 2016 (pdf)
August 2016 (pdf)
April 2015 (pdf) June 2015 (pdf)
August 2015 (pdf)
May 2014 (pdf) August 2014 (pdf)
Some older exams
2012 (pdf1, pdf2, pdf3)
2013 (pdf1, pdf2, pdf3)