Fall 2004 Finance 4366 Weblog

Final Exam and Course Grades

The final exam scores are in.  Here are the descriptive statistics: 

The final course grade distribution is as follows:

You can determine your final letter grade for Finance 4366 by comparing your “Course Grade” number with the following grade distribution:

E.g., if you have a 79.3, this means that you earned a B+.  The class GPA ended up being 3.15 (3 A’s, 2 B+’s, 2 B’s, 1 C+, and 2 C’s).

Information about the Final Exam

I have just finished writing the final exam for Finance 4366.  The test consists of the following sections:

Section 1 (70 points).  This section consists of Problem #1.1 and Problem #1.2.  Each problem is worth 35 points.

• Problem #1.1 addresses concepts such as the theory of risk aversion, risk measurement, insurance pricing, demand for insurance, the certainty equivalent of wealth, the risk premium, etc. (basically stuff we covered prior to the first midterm).
• Problem #1.2 requires mapping out asset price and call option price binomial trees involving 3 timesteps.  The whole point is to determine the current fair market value for a call option.  The problem also addresses the whole issue of "dynamic hedging" in the binomial framework.  You would do well to review rather closely Introduction to Binomial Trees (Part 1) and  Introduction to Binomial Trees (Part 2).  Also the problem set that was assigned for chapter 10 (see Problem Set 6 Solutions).

Section 2 (30 points).  This section consists of Problem #2.1 and Problem #2.2.  Each problem is worth 15 points.

• Problem #2.1 involves computing the delta, rho, theta and vega of a call option and interpreting your results.  You'll want to review my options paper (comparative statics) for this one.
• Problem #2.2 involves setting up a specific option spread strategy, determining the payoffs from such a strategy, and determining a fair price for the spread. You'll want to review chapter 9 of the textbook and the related problem set (see Problem Set 5 Solutions).

Finally, I have also posted a new version of the Formula Sheet for Final Exam which more accurately reflects the exam content than what was previously (i.e., prior to Wednesday, 12/8/04 at 7:15 p.m. Central Time) available from this link.

One final and very important point - the exam will be given from 2-4 p.m. on Friday in HCB 408.  I will not give any makeups.

Tomorrow's (12/7) review session is canceled; I will hold office hours instead

I am canceling tomorrow's review session since I am only now beginning to write the exam.  In lieu of the review session, I'll be available instead for consultation at my office (HSB 351) from 11-12:20 tomorrow.

When I complete my writing of the exam, I plan to post (via email and blog) a very detailed explanation of what you'll need to study for. I hope to get this done by no later than Wednesday, 12/8.

Plan for the last day of class!

I have reconsidered my plan for tomorrow's class, and I have decide to forgo any coverage of my Optimal Exercise Rules for American and European Options lecture note.  We will finish the comparative statics analysis (specifically with respect to the option vega), we can talk about the final exam, and I can also go over any questions you may have concerning problem set 8.  Also, we need to make sure that we get the teacher evaluation done tomorrow as well.

Finals Week: Information concerning review session and office Hours for FIN 4366

Tomorrow, I will be obviously giving the final lecture for the course and have you fill out the teacher evaluation form. 

During Finals week, I am planning on holding a review session as well as on- and off-campus office hours:

• Final Exam Review Session: Tuesday, December 7, 11-12:20, in HCB 408
  
• On-campus office hours: Tuesday, December 7, 2-5 p.m., in HSB 351
• During on-campus office hours, I can also be reached by phone (710-6207), by e-mail (James_Garven@baylor.edu), and AOL Instant Messenger (my screen name is "drgarven").
  
• Off-campus office hours: Wednesday, December 8, 10-11:30 a.m. and Thursday, December 9, 10-11:30 a.m.
• During off-campus office hours, I can be reached e-mail and AOL Instant Messenger.  If you want a callback, email or IM a number and time at which I can reach you.

During Finals week, even if you have a conflict with the times that I have designated above, go ahead and email me, and I will respond as soon as I can (during business hours this will typically be within 30-60 minutes).

Plan for the last two classes

Best wishes for a safe and happy Thanksgiving holiday.  When you come back to campus, we'll obviously be finishing up Finance 4366.  I have really enjoyed the class and wish all of you the best, whatever you are doing after this semester.

Here's my plan for the last two class sessions for Finance 4366.

1. Tuesday, November 30: We will pick up from where we left off today; specifically, we will work through the comparative statics analysis for call and put options (pages 24-37 of the lecture note entitled "The Black-Scholes Model".  Time permitting, we will also work through my write-up on the solution to Problem 12.26 from the textbook.

2. Thursday, December 2: We will cover the lecture note entitled "Optimal Exercise Rules for American and European Options".  The class will conclude with a review session for the final exam, and you will also complete the teacher evaluation form.

I have one more problem set assigned for Finance 4366.  This consists of Hull, Chapter 12, p. 261, questions 12.24, 12.25, 12.27, 12.28, and it will be due on Thursday, December 2.  At that time, I will make the solutions for the problem set available to you. 

The final exam is scheduled for 2-4 p.m. on Friday, December 10 in HCB 408.  It will be comprehensive in nature, and as I note in the course syllabus, the grade you receive on the final will also count for one of your midterm exams if it is higher than the scores on either of the midterms (anyone want to venture a guess as how one might use option pricing theory to compute the value of this option?). 

Risk Neutral Valuation, RADR, CEQ, etc.

As we go through the mathematical details concerning the derivation of the Black-Scholes model, I think it is important to step back for a moment and think about the rationale/motivation behind "risk neutral valuation" and how this concept is related to very simple valuation concepts which were (hopefully) covered in the basic principles of finance course (i.e., Finance 3310).

Risk Neutral Valuation

Perhaps the most important insight in the theory of derivatives pricing involves the notion that a "risk neutral valuation relationship" exists between the price of a derivative security and its underlying asset.  With some algebra, the Black-Scholes nonstochastic partial differential equation (see equation (8) on page 28 of http://129.62.162.249/ofod/fall2004/lecture14.ppt) can be solved for the current call option price ("C").  By inspection, the current option price depends upon the current price of the underlying stock along with other (deterministic) factors such as the rate of interest, the volatility of the underlying stock, and values of three (math) derivatives; specifically, the derivative of the call price with respect to time and the first and second derivatives of the call price with respect to the price of the underlying stock.

You may be thinking "so what?"  The answer is that this result is huge.  The Black-Scholes nonstochastic partial differential equation implies that for a given price of the underlying asset, a call option written against that asset must trade at the same price in a risk neutral economy as it would in a risk averse or risk loving economy.  Since it is easiest to price the option as if investors are risk neutral (since this allows us to be completely agnostic concerning the nature of risk preferences), this is what we do.

Finance 3310 revisited (the "RADR" approach)

Most students' first exposure to pricing of risk comes in the Finance 3310 course, where they learn about the Capital Asset pricing model.  Once this concept is introduced, students are taught to use the CAPM in order to determine the appropriate rate at which to discount the expected value of a future risky cash flow.  This approach to pricing risk is commonly known as the risk adjusted discount rate, or RADR approach.   

The CEQ approach

An alternative approach to pricing risk which was probably not covered in Finance 3310 involves the certainty equivalent, or CEQ approach.  This is a concept which I cover in some detail in the courses that I teach (i.e., FIN/RMI 4335 and FIN 4366).  The CEQ approach involves discounting the certainty equivalent value of the risky cash flow at the risk free rate of interest.  The certainty equivalent is determined by deducting the dollar value of the risk premium from the expected cash flow, and as we showed in class, can also be accomplished by summing the products of state-contingent cash flows multiplied by their corresponding "risk neutral" probabilities.

In summary, the two approaches to pricing risky assets are as follows:

• RADR approach: discount the expected value of the cash flow at a risk adjusted discount rate; e.g., as indicated by CAPM; and
• CEQ approach: discount the certainty equivalent value of the cash flow at the risk free rate.

Risk Neutral Valuation and the Integration approach to computing the value of an option

Derivatives pricing is better understood once one goes through some of the mathematical details.  I realize that for most typical undergraduate (or even master's level) finance students, stochastic calculus is not a particularly familiar topic.  Having said that, I (as well as your textbook author) believe that a basic introduction to concepts such as geometric brownian motion and Ito's Lemma make the underlying economics of the option pricing problem much more transparent; specifically, the notion of dynamic hedging.  However, once we have established this concept, I believe that the integration approach to computing the Black-Scholes option price is easier to grasp than the differential equations approach, since it makes the link between risk neutral valuation and the CEQ approach to pricing risky assets much more transparent. 

Conceptually, the integration approach to option pricing theory represents a calculus-based implementation of the CEQ approach.  Specifically, we compute the certainty equivalent value of the expected payoff on the option, and then discount it back to the present time.  The details of this are laid out in my paper entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations," as well as in the lecture note entitled "The Black-Scholes Model".

Some changes to the problem set dates/assignments

I have changed problem set 7 so that only questions 11.12, 11.13, and 11.16 will be due.  Time permitting, I might try tackling 11.14 and 11.15 in class - no promises though!

Also, the new due date for the final problem set (#8) will be Tuesday, November 30.  Problem set #8 consists of questions 12.24, 12.25, 12.26, 12.27, 12.28 from page 261 of Hull.

Midterm 2 Grades and Current Grade Distribution for FIN 4366

The second midterm scores are in.  Here are the descriptive statistics:

The course grade distribution after the first exam is as follows:

If letter grades had to be assigned today, based upon this distribution I would use the following curve (which would generate a class GPA of 3.17):

due date for problem set #7 will be Thursday, November 18

The due date for problem set #7 will be Thursday, November 18 rather than tomorrow.  I figured that y'all might be interested in knowing this before unduly torturing yourselves this evening.

Option pricing lecture notes now available (for November 11-18 class meetings)

I have posted the lecture notes that we will be using for the next few meetings:

1. Model of the Behavior of Stock Prices (November 11, 2004) - this lecture note is based primarily upon Chapter 11, along with portions of my paper entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations".
2. The Black-Scholes Model (November 16-18, 2004) - this lecture note is based primarily upon Chapter 12, along with portions of my options paper.

Also, a problem set based upon Chapter 11 will be due on November 16.  See http://129.62.162.249/4366problem_sets/ for more details.

Midterm exam 2 blank exam booklet and key is now availble from the class website

The 2nd midterm exam (blank exam booklet and key) is now available from the class website!

On Thursday, we will continue our study of option pricing.  The chapters coming up will be chapters 11 and 12.  I will also post the lecture notes as well as information concerning problem sets fairly soon.  Besides reading chapters 11-12, my paper entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations" will also be required reading.

Midterm exam #2 reminders and "hints"

As I promised, here are some reminders and "hints" that you might find helpful as you prepare for and take the second midterm exam in FIN 4366:

• Exam time and place: HCB 408, 11 a.m. until 12:20 p.m., on Tuesday, November 9.
• The exam consists of three problems and one essay question worth 25 points each.
• The problems on the exam will cover the following topics: 1) pricing of a forward contract using riskless arbitrage arguments, 2) pricing a call option using no-arbitrage and risk-neutral valuation approaches and also using put-call parity to determine the price of a put, 3) using put-call parity to synthetically replicate securities, and 4) an essay on the comparative statics of option prices.

I will not be on campus on Tuesday, so my office hours for that day are canceled.  My graduate assistant, Mr. Derek Fay, will administer the exam at the scheduled time and place. 

Change in problem set assignment

I have decided to make problem set 6 optional.  If you turn it in and your grade is higher than on a previous problem set, I'll use the higher grade from problem set #6 to substitute for the lower problem set grade.  In addition to completing the Introduction to Binomial Trees (Part 2) lecture note, I plan to go through the problem set in class in some detail.  This will help you learn the material even better!

reading assignment for tomorrow

Tomorrow (Thursday, November 4) we'll be completing our study of chapter 10 and starting on chapter 11, so please try to read chapter 11 prior to coming to class.  Also, I updated the Introduction to Binomial Trees (Part 2) lecture note somewhat to be more complete in terms presenting binomial pricing formulas.

We'll complete the Introduction to Binomial Trees (Part 2) lecture note tomorrow and time permitting, move on to another lecture note based upon Chapter 11.  I'll let you know as soon as the chapter 11 lecture note is available.

Notation used in the "Introduction to Binomial Trees (Part 2)" Lecture note

p = probability of an "up" move (1 - p corresponds to the probability of a "down" move);

p' = "risk neutral" probability of an "up" move;

u = 1 plus the rate of return on the underlying asset when there is an "up" move;

d = 1 plus the rate of return on the underlying asset when there is an "down" move;

dt = a discrete time interval, or "timestep" over which the price of the underlying asset changes;

m = the annualized "drift" of the underlying asset; this corresponds to the annualized expected return;

s = the annualized "volatility" of the underlying asset; this corresponds to the annualized standard return;

D  = the number of shares of the underlying asset that you sell short when you put together a hedge portfolio which also consists of a long position in one option;

V = the current market value of a call option;

P = the current market value of your hedge portfolio;

V⁺ = the value of a call option one timestep from now when it makes an "up" move;

V^- = the value of a call option one timestep from now when it makes a "down" move;

Updated Lecture notes, new due date for problem set 6

Since we only covered the first 12 slides in the lecture note from Thursday, I have split this document up into parts 1 and 2; the lecture notes are now entitled "Introduction to Binomial Trees (Part 1)" and "Introduction to Binomial Trees (Part 2)".  We covered Part 1 on Thursday, and I plan to cover Part 2 this coming Tuesday (November 2 (election day)).  Problem set 6 is now due on Thursday, November 4, and the assigned reading for that day will be chapter 11 of the textbook.  I will post a lecture note for chapter 11 sometime prior to next Thursday.

New lecture note and information concerning problem sets

The new lecture note (entitled "Introduction to Binomial Trees"; based upon chapter 10 of the textbook) is now available.  Please download and print it out in preparation for tomorrow's lecture (also, be sure to read chapter 10 if you haven't already done this).

Also, Problem set 5 is due tomorrow, and a 6th problem set (based upon chapter 10) will be due next Tuesday (see the "Problem Sets" page for information on Problem set 6).

Lecture notes for Tuesday, October 26 are now available!

The lecture notes for Tuesday, October 26 are now available!  The lecture is based upon chapter 9 of the textbook, and the title is "Trading Strategies Involving Options".

Updating of class website

I have updated the class website; note that problem set #4 is now due on Tuesday, October 26, and I plan to cover the rest of Chapter 8 on Thursday, October 21.  The reading for Tuesday, October 26 will be Chapter 9 of the textbook, and I plan to post my Chapter 9 lecture notes on the class website by sometime next Monday, October 25.

lecture notes and problem set assignment

During today's class, we will be covering chapter 8: Properties of Stock Options.  Furthermore, problem set #4 is due on Thursday, October 21, and it consists of questions 8.21-8.24 on page 183 of the textbook.

Update on Finance 4366

I am in the process of revising the lecture content and plans concerning chapters from Hull's textbook which I plan to cover.  Tomorrow's lecture, which I have entitled "Futures, Forwards, Options and Riskless Arbitrage", is loosely organized around parts of Chapters 1-3 of the textbook (I am not assigning these chapters as readings, but you are certainly welcome to look them over anyway if you like).   

I will update y'all via email by no later than next Monday (10/18) concerning the schedule for readings, lectures and problem sets for the remainder of the semester.  I plan to focus primarily upon option theory, so we will primarily be dealing with reading assignments and lecture content related to Chapters 8-12 in the textbook.  Our study of option theory will also involve going through my paper on the topic, entitled "Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations", and this paper also includes aspects of Chapter 14.

Midterm 1 Grades and Current Grade Distribution for FIN 4366

The first midterm scores are in.  Here are the descriptive statistics:

The course grade distribution after the first exam is as follows:

If letter grades had to be assigned today, based upon this distribution I would use the following curve (which would generate a class GPA of 2.70):

Midterm exam #1 and key

I have posted midterm exam #1 and key on the class website (go to the class home page, click on the problem sets button, then look under the Other Documents Section, part 3, first two bullet points).  The direct links to these documents are:
 
1. Exam #1: http://129.62.162.249/ofod/midterm1_fall2004.pdf
2. Exam #1 Key: http://129.62.162.249/ofod/midterm1_fall2004_solutions.pdf
 
Anyway, please look these over and I can answer any questions you might have about the exam (other than your exam grade, which won't be available until next Tuesday) at the beginning of class on Thursday.

Various housekeeping issues related to the first midterm exam on Tuesday, October 5

Here are some helpful hints concerning the first FIN 4366 midterm exam which will be given during class this coming Tuesday, October 5.

The exam consists of a total of 4 problems, and I only require that you complete 3 of the 4 problems.  The maximum points possible for each problem will be 32 points. (You get 4 points for showing up and writing your name on the exam booklet :)). At your option, you may also choose to complete all 4 problems, in which case I will count the 3 on which you produce the highest scores.  Here's what you can expect to see on Tuesday's exam:

• One problem that compares and contrasts the stochastic dominance, mean variance, and expected utility models.
• On asset allocation problem (conceptually similar to the third problem on problem set #3).
• Two problems on topics such as certainty equivalents, using Arrow-Pratt risk aversion measures to compare the degree of risk aversion for different consumers, the effect of changes in initial wealth upon the degree of risk aversion, etc.

Let me offer some practical "risk management advice" concerning taking the exam. The first thing you should do when you get the booklet is open it up, skim though the exam, and select the 3 problems which you feel you have the best chance of answering. It also makes sense to assess the level of difficulty of these 3 problems, and get off to a good start by really "nailing" the easiest problem. This strategy will help you build confidence for the remainder of the exam period.

I will not be at the exam on Tuesday, so office hours that day are canceled. In the meantime, if you have any questions or concerns feel free to either email me (at the address James_Garven@baylor.edu) or "IM" me (my AOL instant messenger screen name is "drgarven").

Best of luck on the exam, and I will look forward to seeing y'all next Thursday.

Hints for solving the 3rd problem on problem set #3

The 3^rd problem on problem set #3 is conceptually similar to the gambling problem presented on pages 38-41 of the lecture note entitled "Decision Making under Risk and Uncertainty, part 2.  Here, instead of determining the optimal size of the bet (B^*), you need to find that optimal allocation of your initial wealth W₀ = $1000 to (risky) stock and (safe) bond investments; in other words, since you plan to invest $1,000a in the stock and $1,000(1-a) in the bond, you need to need to find the value for a which maximizes expected utility.
 

The problem is based on the following facts:

• U(W) = ln W
• Current bond and stock prices are B₀ and S₀ respectively. 
• End-of-period bond price is B₁= B₀(1.06) with probability 1.0.
• End-of-period stock price is S₁ = S₀(1.4) with probability .6 and S₁ = S₀(.6) with probability .4. 

In order to compute expected utility of wealth, you must first determine state-contingent wealth (W_s).  Since there is a 60% chance that the stock increases in value by 40%, a 40% chance that the stock decreases 40%, and a 100% chance that the bond increases in value by 6%, this implies the following:

• 60% of the time, W_s = aW₀(1.4) + (1-a)W₀(1.06) = a1,000(1.40) + (1-a)1,000(1.06) = a1400 + (1-a)1060 = 1060 + 340a.
• 40% of the time, W_s = aW₀(.6) + (1-a)W₀(1.06) = a1,000(.60) + (1-a)1,000(1.06)] = a600 + (1-a)1060 = 1060 - 460a.

Therefore, expected utility is:

E(U(W)) = .6 ln[1060 + 340a] + .4 ln[1060 - 460a].

It is up to you to solve for the optimal value of a.  This requires solving the first order condition, which involves differentiating E(U(W)) with respect to a, setting the result equal to 0 and solving for a.

Due dates for Problem Sets 2 and 3

Please note that the due date for Problem Set 2 is Tuesday, September 28, and that the due date for Problem Set 3 is Thursday, September 30.

More on double deductibles

Professor Martin Grace argues that the so-called "double deductible" problem in Florida is more of a problem of high deductibles, where doubling just worsens the problem.  Why are deductibles high?  Professor Grace notes that for some time now, insurers have not been allowed to charge adequate rates, so rate regulations have provided the incentive for the private insurance industry to reduce their Florida windstorm exposure.  Since less risk is privately insured, more risk is borne by policyholders and government in various forms, including higher deductibles and state run risk pools.

Florida provides an interesting case study of dysfunctional regulatory policy.  As Professor Grace so capably documents, the regulatory process has effectively undermined the viability of private insurance and substituted in its place an ad hoc set of risk sharing arrangements which no one particularly likes and very few people understand.  Unfortunately, it appears that things may get worse before they get better.  The New York Times published an article about the "double deductible" problem the other day which enumerates some of the short term measures and longer term reforms that are under consideration.  One idea which has been floated is to provide a cash grant of $500 to everyone who has suffered unpaid insurance losses during the course of this hurricane season.  While such a measure may alleviate some of the short term financial "pain" for affected consumers, from a longer term perspective this is not sound public policy, since policies like this undermine consumer incentives to make prudent risk management decisions (see "Catastrophes and Moral Hazard: The Case of Florida Windstorm Risk").  Actually, this is a classic case of a policy which may have favorable political implications but carries with it rather undesirable economic consequences.  Furthermore, Mr. Tom Gallagher, who is the head of the state's Department of Financial Services, wants to get rid of multiple deductibles and substitute an alternative policy that would enable consumers to insure against aggregate losses and therefore only pay one deductible.  There's nothing wrong with this idea so long as insurers are able to charge a premium which reflects the added risk and cost associated with such a policy. However, why stop there? Why not provide consumers with the option to choose between a policy based upon the current policy form, and the alternative policy proposed by Mr. Gallagher? This would encourage self selection, and therefore allow for more efficient and fair pricing. Besides offering consumers greater choice, such a policy reform would also promote market efficiency and enhance the insurability of Florida windstorm risk. In order to "fix" the Florida insurance market, regulatory reform needs to address pricing issues as well as policy forms.  If not, then over time consumers and the state will continue to suffer from an insurability problem.

"Final" version of the lecture notes from this week

I have done some revision of this week's lecture notes, entitled "Decision Making under Risk and Uncertainty, part 2" (item 6 on the Lecture Notes webpage) and I recommend that you download and print these notes for the next lecture (Thursday, September 23).  I do not plan to make any further changes.

We will begin next Thursday's lecture by covering pp. 29-41 from this week's notes.  We will continue then with the lecture note entitled "Decision Making under Risk and Uncertainty, part 3". 

Class cancellation: Tuesday, September 21, 2004

I have decided to cancel class on Tuesday, September 21, 2004 due to a personal scheduling conflict.  I have readjusted the lecture schedule accordingly, along with dates for quizzes and problem sets.  This will not have any effect with respect to the dates for the two midterms; specifically, the first midterm will still be given in class on Tuesday, October 5, and the second will be administered on Tuesday, November 9.

Solutions for Problem Set #1 are now available from the class website!

Solutions for Problem Set #1 are now available for downloading from the class website.

Problem set 1 is now due on Tuesday, September 14

For your information, I have changed the due date for problem set 1 from Thursday, September 9 to Tuesday, September 14.  On Thursday, I plan to cover the lecture note which was originally intended for today.

Regarding problem sets - there are two ways to submit them to me: 1) electronically (via email sent to problemsets@rmi.baylor.edu) or 2) hard copy (at the beginning of the class period when the problem set is due).  If you opt for the electronic alternative, please use your Baylor email address and not a Yahoo, AOL, MSN, or Hotmail address.  Email which comes from a Baylor email address is always delivered, whereas email coming from Yahoo, AOL, MSN, and Hotmail is often (falsely) identified as spam by the anti-spam filtering software which I use.  Whenever this occurs, the email is automatically deleted; consequently, email sent to me from these types of accounts will often never be delivered.  For that matter, if you ever send me email, try to use your baylor email address so as to avoid this problem.

This week's agenda for Finance 4366

Tomorrow (on Tuesday, 9/7) we will be completing the Statistics Tutorial and moving on to the lecture note entitled Decision Making under Risk and Uncertainty, part 1.  You'll probably want to download and print these lecture notes because I made a few minor changes (corrections and improvements) to them today.  While you're at it, you might also want to download and print the lecture note for Thursday's class, entitled Decision Making under Risk and Uncertainty, part 2, since I also made some minor modifications that that document as well and I expect this to be the "final" version for the time being. Also, Thursday, 9/9 is the due date for the first problem set for this course.

Besides reading the book chapter entitled Risk and Utility: Economic Concepts and Decision Rules, you should also read Supply of Insurance and Measuring Morals: Researchers ask if Americans are cheating more often -- and what can be done about it for tomorrow, and Avoiding Decision Traps for Thursday.

This week's FIN 4366 agenda: Mathematics and Statistics Tutorials

On Tuesday, I will be giving a mathematics tutorial, and this will be followed up with a statistics tutorial on Thursday. Although there are no assigned readings for this week, I highly recommend that you download, print, and read these materials prior to coming to class.

In the math tutorial, I will review elementary principles of calculus which you should have covered in your calculus course at Baylor. The calculus is needed because I will make use of differentiation on a number of occasions (for minimizing or maximizing functions), as well as Taylor series expansions (the latter concept plays a particularly important role in the theory of risk aversion). Similarly, the statistics tutorial will review a number of elementary statistical principles that are important in the study of derivative securities; e.g., concepts such as expected values, variances, standard deviations, covariances, correlations, discrete and continuous probability distributions, the Central Limit Theorem, and the Normal Distribution.

Reminders about class on Thursday, August 26

Dear class,

Here are some reminders about Thursday's class:

1. Read LTCM - Long-Term Capital Management Debacle, The Demonization of Derivatives, and The New Religion of Risk Management.

2. Prior to class, you need to submit a completed version of the student information form. Send this form to studinfo@rmi.baylor.edu as an email attachment. If you prefer, you may also submit a "hard copy" version of the form at the beginning of Thursday's class. This will be "graded" as a problem set, and I will not accept any late submissions, where "late" is defined as past 11:00 a.m.

3. Be sure to avail yourselves of the lecture notes for Thursday's class, which will provide an important context for the "Trillion Dollar Bet" video which we will be viewing in class that day. I also recommend that you peruse the Trillion Dollar Bet website.

Instructions on how to receive the Options, Futures, and Other Derivatives (OFOD) blog as a "news feed"

Dear students,

A very convenient way to keep up with the Options, Futures, and Other Derivatives (OFOD) blog is to receive it as a "news feed". There are several software options available for doing this, many of which are free. I personally prefer a free program called "Pluck". Pluck basically is a "plugin" which integrates itself into Internet Explorer and is therefore very easy to use. Besides Pluck, there are also other free and shareware "standalone" options. I have tried two free programs - "BlogExpress" and "Abilon", and both seem to work just fine. Go to http://www.snapfiles.com/freeware/misctools/fwrssreaders.html for links to these and other free/shareware news reader programs (aka "RSS readers").

Here are some instructions on how to set up your computer to use Pluck:

1. Download "Pluck" by clicking on this link.
2. This will bring up a "file download" dialog box, asking you whether to open or save setup.exe. I recommend that you open this file, which will cause the pluck setup program to be launched.
3. Install the program (by accepting all the defaults).
4. After Pluck is installed, a new Pluck icon will appear in various places; e.g., the Windows taskbar, possibly your desktop, and in the browser. Launch your Internet Explorer Browser, and then launch pluck.
5. You may have to give some private information away in order to get full use of Pluck - go ahead and do this - it is well worth the "price".
6. Go to the OFOD blog, look for the link on the bottom right hand side of the site that says "Syndicate this Site", and click on this link (alternatively, open your browser and go directly to http://129.62.162.212/weblogs/ofod/index.rdf

7. Congratulation! You now are subscribed to the OFOD blog as a "news feed". You can access your news feed any time by activating Pluck, and then clicking on "RSS Reader".

The first of many announcements for the Fall 2004 Options, Futures and Other Derivatives course

Dear students,

For your convenience, most class materials (except for the textbook) are available from the course website, located at http://129.62.162.212/fin4366. Since most of the links on this website require user authentication, you can authenticate yourself by using your Bear ID as your username and the last four digits of your social security number as your password.

Although I plan to distribute a paper syllabus on the first day of class, in the meantime you may obtain a copy of the syllabus from the class website by using either of the following addresses: http://129.62.162.212/fin4366/syllabus.asp (HTML version) or http://129.62.162.249/ofod/fall2004/fin4366syllabus.pdf (Adobe Acrobat (PDF) Version). Lecture notes for the entire semester are available in PowerPoint and Adobe Acrobat (PDF) file formats. Download whichever version you prefer. These notes can be accessed by clicking on the "Lecture Notes" button on the home page for the class website. I highly recommend that you download and print the lecture notes prior to coming to class, as they will make it much easier for you to follow my lectures. Although the class schedule is subject to change, the lecture notes page effectively serves as a class calendar, since it lists by date the sequencing of course material for the entire semester.

This is the first time that I have used a weblog for the purpose of communicating with my students outside of class. In my view, "blogging" is a better method for doing this than email. If you need to communicate with me via email, send your email to my Baylor address, which is James_Garven@baylor.edu.

Let me know if y'all have any questions. I am looking forward to our first class meeting on Tuesday, August 24.

Sincerely,

Dr. Garven