I develop, critically assess, and apply theories of pricing derivatives. Topics: forward and futures contracts; interest rate and currency swaps; trading strategies; early exercise of American options; binomial option pricing; the Black-Scholes-Merton option pricing model; extensions of the BSM model; risk management with options; empirical evidence and time-varying volatility; the pricing and hedging of corporate securities (common stock, senior and junior bonds, callable bonds, warrants, convertible bonds, and putable bonds) and credit risk. I emphasize the application of the theory to the management of risk. I make every effort to bring out the intuition behind the results.

Business 35000, helpful but not required. Cannot enroll in BUSN 35100 if BUSN 20405 taken previously.

Lecture notes and readings posted weekly on the course web site; J. Hull, Options, Futures and Other Derivatives; and J. Hull, Solutions Manual. Optional textbook: R. McDonald, Derivatives Markets.

Based on weekly problem sets, case studies, a mid-term examination, a final examination, and class participation. No auditors.