Lecture Hours and Venues: Tuesday 10:30am-12:15pm and Thursdays 12:30pm-1:15pm, both at LT4, LSB

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:

Lee Ho Fung, Office: Rm 222C, LSB, Tel: 2609-8570, Email: hflee@math.cuhk.edu.hk
Wong Ting Kam Leonard, Office: Rm 226, LSB, Tel: 2609-7955, Email: tkwong@math.cuhk.edu.hk

Tutorial Hours and Venues: M5, LSB C1; M7 SCE E106

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 certainly will be. 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.

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 -- Options
• Chapter 3 -- Interest Rates and Forwards
• Chapter 4 -- Put-Call Parity
• Chapter 5 -- Trading Strategies (will not be taught in class)
• Chapter 6 -- Geometric Brownian Motions
• Chapter 7 -- Ito's Lemma
• Chapter 8 -- Black-Scholes Equations
• Chapter 9 -- Extensions of Black-Scholes Model
• Chapter 10 -- Binomial and Monte Carlo Methods

Tentative Teaching schedule:

• Week 1: Chapter 1
• Week 2: (Tuesday class canceled because of typhoon) Chapter 1 (1st Assignment)
• Week 3: Chapter 2
• Week 4: Chapters 2 and 3 (2nd Assignment) (National Day Holiday)
• Week 5: Chapters 3 and 4
• Week 6: Chapter 6 (3rd Assignment)
• Week 7: Chapters 6 and 7
• Week 8: Mid-term (Oct 27) and Talk by external speaker (Oct 29)
• Week 9: Chapters 7 and 8 (4th Assignment)
• Week 10: Chapter 8 (Programming Assignment)
• Week 11: Chapter 8 (5th Assignment)
• Week 12: Chapter 9
• Week 13: Chapter 10 (6th Assignment, if time allows)

Talk will be by Dr. Yves Guo (Executive Director, Equity Derivatives--Goldman Sachs (Asia)) on "Options Trading in the Real World"

Assessment Scheme:

• Five/Six Homework Assignments: 15 marks
  Solution will be uploaded right after due date. So no late homeworks will be accepted.
• One Programming Assignment (in any language you like): 5 marks
  
• One Mid-term (Oct 27, 10:30am-12:00pm): 20 marks
  
• Final Examination (date centrally scheduled): 60 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.