Tomorrow, after going through the solutions for yesterday’s midterm exam, I 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 tomorrow’s class 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
Also, see the Quizzes section of Canvas – Quiz 8 (which must be completed prior to the start of class tomorrow) is based on these readings.