Lecture Hours and Venues: Every Tuesday 10:30am-12:15pm and every Thursday 12:30pm-1:15pm at LT3, Lady Shaw Building

Tutorial Hours and Venues: Every Monday 2:30pm-3:15pm at LG204, WLS and every Tuesday 5:30pm-6:15pm at Rm402, ERB

Lecturer Office Hours: Every Thursday 11:30am-12:15pm, but please send me an email (rchan@math.cuhk.edu.hk) or call me first (2609-7970), if possible.

About the Lecturer: Raymond Chan

About the Tutors: Eric Lau (Rm 101) and Raymond Wong (Rm 226)

Course Objective: Topics of the course will include: Basic option theory, forward and futures contracts, model of asset price, Ito's Lemma, asset price random walk, Black-Scholes model, free boundary problems of options, discrete random walk model, the binomial methods, Monte Carlo methods, and if time allows, finite difference method.

Prerequisite: This course is about the mathematics of option pricing. Students taking this course are expected to have good knowledge in probability theory and partial differential equations. You can download Chapter 8 (click here) of my lecture notes to get a feeling of the mathematics level required. If it seems difficult to you, it probably is. May be you should then consider similar courses offered in the University, e.g. FIN4110 or RMS4007. They most likely will require less mathematical knowledge.

News:

• SIAM News, December 2005 Issue: Career Fair at New York University Lures 300+ Financial Math Students

Textbooks:

• Options, Futures and Other Derivatives, by John Hull (Prentice Hall)
  
• The Mathematics of Financial Derivatives: a Student Introduction, by Paul Wilmott, Sam Howison and Jeff Dewynne (Cambridge University Press)
• Mathematical Models of Financial Derivatives, by Yue-Kuen Kwok (Springer)

• Fundamentals of Futures and Options Market, by John Hull (Prentice Hall)
• Option Pricing: Mathematical Models and Computations, by Paul Wilmott, Sam Howison and Jeff Dewynne (Cambridge)
• An Elementary Introduction to Mathematical Finance: Options and other Topics, by Sheldon Ross (Cambridge)

Lecture Notes:

1. The first 7 chapters are modified from the lecture notes prepared by Prof. Xun Li of The National University of Singapore, and are based on the book "Options, Futures and Other Derivatives" by John Hull.
   
2. The remaining chapters are based on the book "The Mathematics of Financial Derivatives: a Student Introduction" by Paul Wilmott.
3. Some proofs are taken from the book "Mathematical Models of Financial Derivatives" by Yue-Kuen Kwok.

• Chapter 1 -- Introduction
• Chapter 2 -- European Options
• Chapter 3 -- American Options and Interest Rates
• Chapter 4 -- Put-Call Parity
• Chapter 5 -- Trading Strategies
• Chapter 6 -- Geometric Brownian Motions
• Chapter 7 -- Ito's Lemma
• Chapter 8 -- Black-Scholes Equations
• Chapter 9 -- Binomial and Monte Carlo Methods
• Chapter 10 -- Extensions of Black-Scholes Model

Tentative Teaching schedule:

• Week 1: Chapter 1
• Week 2: Chapters 1 and 2
• Week 3: Chapters 2 and 3 (1st Assignment)
• Week 4: Chapter 3
• Week 5: Chapter 4 and Lunar New Year Holiday
• Week 6: Chapter 4 (2nd Assignment)
• Week 7: Chapter 5 and Test 1 (Feb 21)
• Week 8: Chapter 6
• Week 9: Chapter 6 (3rd Assignment)
• Week 10: Chapter 7
• Week 11: Chapter 8 and Guest Talk by Yves Guo
• Week 12: Chapter 8 and Test 2 (March 27) (4th Assignment)
• Week 13: Chapter 8 (Programming Assignment)
• Week 14: Chapter 9
• Week 15: Chapter 10 (5th Assignment)

Last year, we arranged a talk by by Freda Chan (Head of Debt Instruments, Core Pacific-Yamaichi) on "Bonds Trading in the Real World". This year, there will be a talk on March 20 by Yves Guo (Executive Director, Equity Derivatives--Goldman Sachs (Asia)) on "Options Trading in the Real World".

Download Area:

• Lecture notes
  
• Assignments and solutions

Assessment Scheme:

• Five Homework Assignments: 10 marks
  
• One Programming Assignment (in any language you like): 5 marks
  
• Two Tests: 30 marks
  
• Final Examination (date centrally scheduled): 55 marks
  

Important Remarks:

• If you are found cheating, you will automatically get an F grade in this course and your act will be reported to the Department for necessary disciplinary actions.
• To avoid copying of programs, your programs may be spot-checked, i.e. you will be asked questions regarding the statements in your program when you hand in your program in person.
• Please don't let others copy your assignments or programs as we don't have a way to tell who is copying who and you may be liable to the penalties.