Derivative Securities, Fall semester, 2010

Resources and source material


John Hull, Options, Futures, and other Derivatives, seventh edition. It is available from bookstores and online book sellers.

Lecture notes

Lecture notes by Bob Kohn

Suggested readings from Hull

  • Week 1: Chapters 1 and 5. You may have to read chapters 2 through 4, at least lightly, to understand chapter 5. The class will not cover market details as much as Hull does.
  • Week 2: Chapters 10 and the first half of chapter 11. The abstract discrete market stuff comes from the book Dynamic Asset Pricing Theory by Darryl Duffie. However, that discussion is has many mathematical errors.
  • Week 3:Chapter 11 of Hull.
  • Week 4: I follow Kohn in doing the Black Scholes formula before Brownian motion. Hull does Brownian motion first, in Chapter 12. The Black Scholes formula is in Chapter 13. Chapter 14 is for those looking for a career as the options valuation expert in a law firm, but it is short and fun to read. Chapter 18 has a good discussion of implied vol.
  • Week 6: The continuous time limit of random walk and Ito's lemma are discussed in Chapter 12. You should read this carefully. You also should read Chapter 13 through Section 13.6. With this we complete doing this part of Hull out of order.
  • Week 7: It is hard to follow this week's material in Hull. You could read Chapter 19, but I disagree with most of the material there.
  • Week 8: Chapter 22 has a good discussion of credit risk and the relationship between historical and implied default rates.
  • Week 10: Chapter 27 has the discussion of market price of risk etc. Chapter 30 discusses short rate models.

Other notes and web resources