2020 Fall FE620 Pricing and Hedging
Course Catalog Description
Introduction
The course will give a basic understanding of the main concepts of the financial derivatives. It will explain the mechanics of the derivatives, their economic rationale and the methodology used for their valuation. You will learn about futures, forwards, options and swaps, and their combinations.
Campus  Fall  Spring  Summer 

On Campus  X  X  
Web Campus  X  X  X 
Instructors
Professor  Office  

Dan Pirjol (A,WS)

dpirjol@stevens.edu  Babbio 303a 
Zachary Feinstein (B)

zfeinste@stevens.edu  Babbio 628 
Dongxu Li (A, WS)  Teaching Assistant

dli36@stevens.edu  
Yunfan Zhu (B)  Teaching Assistant

yzhu25@stevens.edu 
More Information
Course Description
The course is one of the core courses for the Financial Engineering (FE) program.
Pedagogy: The course will consist of lectures, inclass exercises, homework and a project.
Prerequisite:
Basic concepts of probability and statistics, calculus. Knowledge of a programming language (Python or Excel are preferred).
Course Outcomes
The course will give an introduction to financial markets, products and their valuation and hedging. The course introduces the main concepts of the equity, FX, interest rates markets, and describes the financial products and derivatives commonly traded, their risks and hedging.
Learning Goals:
 The course will introduce the concepts of the yield curve, credit risk, exchange rates and will describe the main financial contracts traded in the markets.
 You will understand how to price the derivatives, using riskneutral pricing, and how to compute their sensitivities to changes of the market factors.
 You will know how to measure the risks of a derivative or a portfolio of derivatives, using Value at Risk and Expected Shortfall.
 You will understand how to hedge the risks of a derivative or of a portfolio of derivatives.
Course Resources
Textbook
John Hull, Options, Futures and Other Derivatives. 10th Edition, Pearson.
Additional References
Sections from the required text, as indicated for each class.
Additional Readings: Additional readings will be provided, as needed.
Grading
Grading Policies
Assignments: Assignments will be provided throughout the semester, consisting of problems related to the material taught in the lectures. They are to be handed in on time. No late assignments, without prior approval, will be accepted. There is a project for the course and a final exam. The total grade is a weighted average of the attendance, assignments, project and final exam.
Participation (this is automatic for WS students)  5%
Assignments  35%
Project  30%
Final Exam  30%
Preliminary Grading Scheme:
A : 93%100%
A : 90%93%
B+ : 87%90%
B : 83%87%
B : 80%83%
C+ : 77%80%
C : 73%77%
C : 70%73%
D+ : 67%70%
D : 65%67%
F : 0%65%
This grading scheme is subject to change based on student outcomes. It may be curved more leniently. It will not be made more difficult.
Lecture Outline
Topic  Reading  

8/28  Introduction to financial markets and derivatives  Chapter 1 
9/4  Interest rates and bonds: Discount factors, compounding, zero rates, swap rates, forward rates, bonds and their pricing, duration and convexity  Chapters 4.14.11 
9/11  Credit: hazard rate and risk discounting. Credit spreads and credit default swaps.  Chapters 24.124.5 and 25.125.2 
9/18  Swaps: interest rate swaps, crosscurrency swaps. Introduction to exchange rates.  Chapter 7 
9/25  Futures and forward contracts. Equity, FX and commodity futures. Forwardfutures relationship.  Chapters 56 
10/9  Option pricing in discrete time. Binomial tree, riskneutral pricing. American options on trees.  Chapter 13 
10/16  Option pricing in continuous time. Basic notions of stochastic processes: Brownian motion and geometric BM. BlackScholes model. Volatility.  Chapters 1415 
10/23  Greeks: Delta, Gamma, Vega. Volatility Smile (time permitting).  Chapters 1920 
10/30  Incomplete markets and risk measurement. ValueatRisk and Expected Shortfall  Chapter 22 
11/6  Basic numerical procedures  Chapter 21 
11/13  TBD – topics to be discussed based on course progress.  
11/20  TBD – topics to be discussed based on course progress.  
11/27  Thanksgiving Recess – No Class  
12/4  Project presentations 