Derivative Pricing (F) NOTE: Postponed to Fall 2020
The course will give the student a solid foundation in both classical and modern aspects of option pricing and trading. We will start out by developing a thorough understanding of the notion of replication. Following this, we cover the famous Black-Scholes (1973) model which is the backbone of option pricing in practice still today. We then look at the model’s shortcomings and the presence of the so-called implied volatility smile. The volatility smile has been a main driver for the theoretical development in option pricing we have experienced over the past 30 years. We will look at modern extensions, e.g., stochastic volatility models, which have been proposed to address the vol smile. While option pricing theory is necessarily quite mathematical, the course will also try to develop the student’s intuitive understanding of the results. Furthermore, the course will consider several practical examples and assignments from especially fixed income, giving the student a feeling of how the theory comes to life on the trading floor.
A tentative list of topics that may be covered in the course:
- Static and Dynamic Replication
- The Black-Scholes Model
- Options Hedging
- The Volatility Smile
- Trading Strategies
- Local Volatility Models
- Stochastic Volatility Models
- Some Numerical Methods
- Jump-Diffusion Models
MSc programme in Economics – elective course
The course is part of the MSc programme in Economics-Financial line (symbolized by ‘F’).
After completing the course, the student should be able to:
Describe and understand common options and the mechanics underlying them
Explain the terminology used in the industry
Explain the motivation behind different options and their use.
Explain the motivation behind different pricing models and their use.
Discuss hedging strategies
Discuss trading strategies
Discuss option pricing models
Discuss numerical methods for pricing models
Calculate prices and quantify risk figures for common options using various models
Calibrate different pricing models to market data.
Evaluate the advantages and disadvantages of pricing models
Evaluate advantages and disadvantages of hedging strategies
Evaluate advantages and disadvanteages of trading strategies
Analyze option trades
Analyze hedging strategies
Analyze pricing models
Formulate and structure risks in terms of options/derivatives
Formulate and struture option pricing models
Develop and implement hedging strategies
Develop and implement trading strategies
Combine the theory of option pricing and empirical/practical implementation
Lectures, tutorials, and discussions of research papers
The main reference is E.Derman & M.B. Miller, “The Volatility Smile” (2016). However, the course will also include various research papers.
The course is not intended to be an introductory course. Students are assumed to have prior knowledge of fixed income markets (mainly Bonds and Swaps) and basic contingent claim theory (e.g. from “Corporate Finance and Incentives” or “Pricing Financial Assets ”) at the level of the Hull textbook ("Options, futures, and other derivatives"). Finally, as the course is quite quantitatively demanding, students should at least have some interest in math and statistics.
2 hours lectures 1 to 2 times a week from week 36 to 50 (except holidays).
The overall schema for the Master can be seen at KUnet:
MSc in Economics => "courses and teaching" => "Planning and overview" => "Your timetable"
KA i Økonomi => "Kurser og undervisning" => "Planlægning og overblik" => "Dit skema"
Timetable and venue:
To see the time and location of lectures please press the link under "Se skema" (See schedule) at the right side of this page (E means Autumn).
You can find the similar information in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-E20; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Efterår/Autumn – Week 31-4”
Press: “ View Timetable”
The timetable will be available from 1st of May 2020
For foreign students not enrolled: Admission requirements, registration etc: Study Economics.
For gæste- og enkelfagsstuderende: Tilmelding og information via Uddannelse i Økonomi.
- 7,5 ECTS
- Type of assessment
Written examination, 3 hours under invigilationThe exam assignment is given in English and must be answered in English.
- Written aids allowed
- Marking scale
- 7-point grading scale
- Censorship form
- No external censorship
for the written exam. The exam may be chosen for external censorship by random check.
Criteria for exam assessment
Students are assessed on the extent to which they master the learning outcome for the course.
To receive the top grade, the student must with no or only a few minor weaknesses be able to demonstrate an excellent performance displaying a high level of command of all aspects of the relevant material and can make use of the knowledge, skills and competencies listed in the learning outcomes.
Single subject courses (day)
- Course number
- 7,5 ECTS
- Programme level
- Full Degree Master
Information about admission and tuition fee: Master and Exchange Programme, credit students and guest students (Open University)
Go to "Remarks".
Exam and re-sits: Go to "Exam".
- Department of Economics, Study Council
- Department of Economics
- Faculty of Social Sciences
- David Sloth Pedersen (3-6877744469677372326f7932686f)
See 'Course Coordinators'.
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Courseinformation of students