Economics: Option Theory

<p>“You will learn how different derivative instruments—primarily options, futures and swaps - are priced and used for hedging and speculation. The course is based on probability theory and mathematical reasoning.</p><p>In this course we address two perspectives on derivatives: pricing and use.</p><p>You will gain an understanding of how derivatives, primarily options, are priced. Using arbitrage arguments, we derive the correct price of a derivative.</p><p>By learning how pricing works and which factors influence it, you will be able to interpret the characteristics of a derivative and how it affects a portfolio of assets. This in turn enables you, whether as an investor or working in a company’s finance department, to use different derivatives either for speculative purposes - for example, building a trading strategy based on expectations of a future share price - or for hedging purposes, such as protecting your company’s foreign sales when converted into Swedish kronor.</p><p>We study the following financial instruments in detail:</p><ul><li>Options: primarily European and American options, but also certain specialised options, known as exotic options</li><li>Forwards and Futures: both customised contracts (forwards) and standardised contracts (futures)</li><li>Swaps: various types of interest rate and currency instruments, including FRA (Forward Rate Agreement), IRS (Interest Rate Swap), and CCS (Cross Currency Swap)</li></ul>