45-823 Options

6 units, Carnegie Mellon University

This course covers derivative markets, valuation and risk management. Derivatives are financial instruments that "derive" their value from an underlying asset. Derivatives contracts come in a variety of forms, including forwards, futures, options and swaps, and are used by corporations, institutions and individuals to manage price risks associated with stocks, bonds, interest rates, commodities, currencies and credit. The course begins with an exploration of why derivatives exist and a description of key derivatives contract markets. Next, we cover valuation. Specific topics include no-arbitrage pricing relations, valuation with the Black-Scholes/Merton formula, binomial models, and Monte Carlo simulation, implied volatility, and the "Greeks". The final section of the course explores specific derivative products and risk management problems, including portfolio insurance strategies, employee stock options, stock price collars, and commodity hedges.

Prerequisites: 45-820 (min C) and 45-720 (min C)

Offered: Fall 2026, Fall 2025

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