This Thursday, we will introduce the topic of (financial) derivatives (specifically, options and futures) in Finance 4335. Besides their use in managing price-related risks (for more on this, see “A Beginner’s Guide to Hedging“), the basic principles behind these types of financial instruments also yield insights into how firm-specific risks affect corporate value, which is a concept that we will explore in some detail during upcoming Finance 4335 class meetings.
The assigned readings for class on Thursday include:
1. Derivatives and Options (Doherty, Chapter 6)
2. Teaching the Economics and Convergence of the Binomial and Black-Scholes Option Pricing Formulas, by James R. Garven and James I. Hilliard
I will close by pointing out that besides my lecture notes on Futures and Forwards (see pp. 5-13 of the Derivatives Theory, part 1 lecture note), it’s hard to beat the following video tutorial on this topic: