Course Objective: The course is a continuation of MS&E 242 and focuses primarily on derivative securities: futures, options, advanced option concepts and interest rate derivatives. The main concept of the course is that of translating the condition of no-arbitrage into a pricing equation-most often through the use of risk-neutral probabilities. The course considers applications to hedging, design of portfolios, and pricing of complex derivatives including options on physical goods (so-called real options). The course is primarily in a lecture format but there are projects as well, which test both problem formulation and computational design.

Textbook: Investment Science, Luenberger, David G., Oxford University Press, 1998

Prerequisite: MS&E 242.

Honor Code: The Stanford University Honor Code is respected in this course. Students are required to do their own work. For exams, this means all work must be done individually. For homeworks, you may consult your group members and the TA, but not other groups.

Evaluation:
Homeworks:  20%  
MidTerm:  30%  
Final:  50%  

Homeworks: Each homework is to be carried out in groups. Each group should not consist of more than 4 persons. The students should form their own groups. Since the homeworks are done in groups, no separate class project shall be assigned, but there shall be some homeworks that would involve computations and use of a spreadsheet program such as Excel. Each student much write up atleast one problem. The cover sheet must indicate the group members and the problem that each person wrote. Co-operation with other groups is not allowed.

The homeworks are due by 4 pm on the due date in a box that shall be kept outside Roz Morf's office, Terman 405. No late submissions are allowed. Announcements regarding the graded homeworks and pickup shall be sent by Email.

Exams: Both exams are open book.
Midterm:  Thursday, February 19, In Class. (Tentative)  
Final:  Thursday, March 18, 3:30-6:30pm. Location TBA.  
Open book. Please bring a calculator.