CFRM 544: Options and Derivatives

This course provides basic knowledge of the theory, statistical modeling and computational methods of pricing options and other derivative products. The course blends mathematical and statistical theory with hands-on computing. The first part of the course will emphasize options on stocks, stock indices, currencies and futures, and the latter part will focus on interest rate derivatives. Course work includes assignments in theory and computation, and either a final exam or a project.

  • Brief review of forwards, futures, and options basics
  • Black-Scholes theory and dynamic hedging with the Greeks
  • Volatility estimation, implied volatility, the volatility smile
  • Option prices using additive and multiplicative binomial, and use of trinomial trees
  • Option pricing under fat-tailed non-normality
  • Computational methods for exotic options and complex derivatives
  • Brief review of interest rate basics: zero rates, forward rates and term structure Interest rate derivatives: standard market models, short rate and advanced models
  • Analytic models and tree models for pricing interest rate derivatives
  • Valuation of bonds with embedded options, option adjusted spreads


Steve Golbeck
Hull, J. C. (2009). Options, Futures and Other Derivatives, 7th edition (or most recent edition available at time of course offering), Prentice Hall. Tuckman, B. (2002). Fixed Income Securities, 2nd edition, Wiley
R and selected R packages
CFRM 462 Introduction to Computational Finance and Financial Econometrics and CFRM 541 Investment Science coverage of forwards, futures and options, or equivalent. CFRM 542 Financial Data Modeling and Analysis in R is desirable.