Basic financial instruments. The distribution of the rate of return of stocks. Random walk model of stock prices, ideas of L. Bachelier and B. Mandelbrot, Brownian motion. Historical data, normal and log-normal distributions. Black-Scholes formula, its modifications.
Trading strategies involving options, straddles, strangles, spreads etc.
Trading and hedging of derivatives. Hedging of other greeks. Elementary derivation of Black-Scholes formula, arbitrage, risk neutralvaluation, binomial models, modifications of binomial models. Exotic options, Asians, Barrier options, Binary options. At the very end the course we will discuss more advanced topics related to partial differential equations and stochastic differential equations, these topics will not be included in the final exam for undergraduates taking this class.