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Syllabus
Syllabus
420: Derivatives
Professor Jongsub Lee
Spring 2024
Course Description
Derivative securities are securities whose payoffs are derived from the values of more funda-
mental underlying variables. Such securities have become ubiquitous in today’s Financial world:
as of year 2018, the notional outstanding of all derivatives contracts worldwide in just the over-
the-counter market is over $544 trillion representing a market value of over $9.7 trillion, and it
is estimated that over 90% of the world’s 500 largest companies use derivatives to manage their
risk.
• To understand the valuation and hedging of derivative securities at both an intuitive level
and a formal one.
• To understand the uses of derivative securities in the management of risk as well as poten-
tial dangers stemming from the use of these securities.
A number of case studies will also be used as illustrations of the concepts we develop. The
course is essentially self-contained in that no background knowledge of derivative securities is
presumed. Of course, a basic knowledge of financial markets and instruments (equity and
debt) is a must.
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251.420: Derivatives
Course Materials
• Lecture notes and problem sets will be available on the SNU course website.
– Problem sets are circulated with solutions. You need a (financial) calculator or excel
spreadsheet for this class.
– I will include chapter references for these optional textbooks in course notes, or an-
nounce them at the end of each class.
– It is not necessary to buy these textbooks. However, if you plan a career in investment
banking, HULL is the most widely used reference on derivatives in the industry, while
SD is more intuitive and has a more detailed discussion of credit derivatives.
Grading Policy
The typical SNU Business School grading scale will be used. I reserve the right to curve the
scale dependent on overall class scores at the end of the semester. The grade will count the
assessments using the following proportions:
Students who are absent for over 1/3 of the class will receive a grade of ‘F’ or ‘U’ for the course.
Moreover, students who wish to be evaluated under the S/U grade scheme should notify their
intention by midnight on March 11th, 2024. Any requests made after this deadline will not be
considered.
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251.420: Derivatives
• Readings: Chapter 12 Binomial Trees (HULL); Chapter 12 Binomial Option Pricing, Chap-
ter 13 Implementing the Binomial Model (SD)
• Readings: Chapter 18 The Greek letters (HULL); Chapter 17 Sensitivity Analysis: The
Option “Greeks" (SD)
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251.420: Derivatives
• Exotic Options
• Readings: Chapter 25 Exotic Options (section 25.1, 25.4, 25.5, 25.6, 25.7, 25.8, 25.9, 25.10,
25.12, 25.13, 25.16) (HULL); Chapter 18 Exotic Options I: Path-Independent Options, Chap-
ter 19 Exotic Options II: Path-Dependent Options (section 19.1, 19.2, 19.3, 19.4)(SD)
• Eurodollar Futures
• Readings: Chapter 4 Interest Rates (section 4.1, 4.2, 4.3, 4.7) (HULL); Chapter 6 Interest-
Rate Forwards and Futures (section 6.1, 6.2, 6.3, 6.4) (SD)
• Readings: Chapter 7 Swaps (section 7.1–7.8) (HULL); Chapter 23 Interest-Rate Swaps and
Floating-Rate Products (section 23.1–23.7) (SD)
• Readings: Chapter 23 Credit Risk (section 23.6) (HULL); Chapter 32 Structural Models of
Default Risk (SD)
• Total Return Swaps (TRS), Credit Default Swaps (CDS), Correlated Default Products
Week 14, 06/03 - 06/07: Wrap-up and/or some additional topics on credit derivatives
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