Welcome to my course on financial derivatives. This is the second course in a sequence of finance courses offered to students at Harvey Mudd College. This course is designed to be an extension of Economics 104, my introductory finance course, which is a prerequisite for this course (I sometimes waive the prerequisite because of scheduling problems at Mudd. If I have done this for you, then I suggest that you review my lecture slides for that course at http://www2.hmc.edu/~evans/e104ls.htm in particular Lectures 7,8,9, and 11)..
To get a better idea of the topics that we are going to cover, look at the course calendar. The topics to be covered include a review of compounding and discounting formulas and measures of risk and volatility, a discussion and analysis of put and call options, futures and forward contracts, futures options and swaps. We give special emphasis to understanding and using the value and pricing models, and volatility models.
Mostly we want to explore the exotic and fascinating world of financial derivatives. We will begin by simply understanding how they work and for what purpose they are used. Then we probe a little more deeply, after discussing arbitrage and hedging possibilities, to develop rational explanations of their pricing and valuation. We also want students to be aware of the opportunities for hedging and reducing risk offered by derivatives, and to think strategically about their use for these purposes. By the end of the class, students should feel comfortable about this complex financial environment.
Some of you may choose to work in finance for hedge funds, as investment analysts, and so forth. Every year we seem to place more students into this industry (why? because they love quants!!). This course is carefully tailored to help prepare you for job interviews and work in this field.
This course requires (unless I allow this to be waived – see the opening paragraph) that you have taken Economics 104, Financial Markets, or the equivalent at another college. Generally, a student in this class must be very familiar with the structure and operations of equity and bond markets because this course covers the market for derivatives that are derived from those fundamental markets. There is no review of those markets in this class. It is assumed that you know this material already.
The textbook assigned for this course is Options, Futures, and Other Derivatives, 7th edition, by John C. Hull, Pearson/Prentice Hall, 2008, ISBN 0136015867. Earlier editions of the book, including the 6th, are not acceptable substitutes. This book has been revised and expanded substantially from earlier editions. Unlike some of my other courses, because this course content is so advanced, I rely very heavily upon this textbook in this course. Bottom line here: you can’t cut corners, you have to buy and read this book. I’m sorry that it is so expensive.
I am also assigning When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein, ISBN 0375758259 (an inexpensive paperback).
Much of our class information comes from some very detailed PowerPoint slides that I will use in my lectures. We will also rely upon a lot of reading material that is available free from the internet. When the time comes we will simply find it (I provide the URLs), download it, print it, and read it, all for free! The internet has proven to be an increasingly reliable source of good material for courses like this. These slides are posted on web page http://www2.hmc.edu/~evans/e136ls.htm.
We also have some interactive course assignments, most of which are based upon applications in Excel workbooks. Some of these we will do together in class, and some you will do after class hours. These assignments will be made available on the course assignments web page, http://www2.hmc.edu/~evans/e136ca.html . Postings to this page will be made as the class proceeds. I will tell you during lectures when it is time to do one of these assignments, but it is nonetheless a good idea to check the course assignments page from time to time. These homework assignments are typically not corrected and are not graded, but exam questions are sometimes based upon these assignments and in some cases I require you to bring the completed assignment to the examination to extract material for exam questions.
Your grade for this course will be based upon your accumulated scores from three equally-weighted exams, including the final exam. It is easy to make mistakes when grading exams. Your final grade will be based upon a final distribution for the class after the final has been taken. The cutoff points for different letter grades are not determined until I have evaluated that final distribution. If you are concerned about your grade prior to the final, do not ask me what score you will have to earn to meet your grade target. I will not know because I will not have seen the final distribution. I don’t (really can’t) give extra credit assignments to compensate for low exam scores.
You have the right to appeal a grade on an exam so long as the following procedure is used:
To appeal a grade on an exam, you must submit to me the basis of your complaint (explaining why you should have been given a higher score) in writing on an 8 1/2" by 11" sheet of paper within a week of receiving back your graded exam. I will be willing to talk to you at length about your exam, but not about changing the score on your exam, unless you have first followed the procedure above. To this rule I make one exception: if I have improperly posted your grade because I made a mistake adding the score, you need only tell me.
I do hold regular office hours, which will be announced in class but, given your busy schedules, whatever hours I might choose might conflict with most of yours. If you merely drop by there is a good chance you will find me. I do make appointments - that way we can meet at a time convenient to both of us. The best way to make an appointment is by email. If you ask after class and I don't have my calendar with me, I might forget! My email address is
garyrevans@gmail.com
The detailed schedule for the course, including exams, is shown on the course calendar.