21-370 Discrete Time Finance

9 units, Carnegie Mellon University

This course introduces the Black-Scholes option pricing formula, shows how the binomial model provides a discretization of this formula, and uses this connection to fit the binomial model to data. It then sets the stage for Continuous-Time Finance by discussing in the binomial model the mathematical technology of filtrations, martingales, Markov processes and risk-neutral measures. Additional topics are American options, expected utility maximization, the Fundamental Theorems of Asset Pricing in a multi-period setting, and term structure modeling, including the Heath-Jarrow-Morton model. Students in 21-370 are expected to read and write proofs. Acceptable corequisites include 21-325 or 36-225 (Three 50 minute lectures)

Prerequisites: (21-270 or 70-492) and (21-269 or 21-268 or 21-256 or 21-259)

Offered: Fall 2026, Fall 2025

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