Georgetown University

Options Pricing and Risk Management

In recent years, options and other derivatives markets have become increasingly important in the world of finance and investments. Thus, it is essential for all finance professionals to understand how these markets work, how these derivatives can be used, and what determines the prices of derivatives. This course addresses these issues and also examines trading strategies involving options. The course also explores specific applications of options in the corporate setting, including executive stock options and real options. Finally, the course examines how corporations can manage currency, commodity price, interest rate, and other risks they face in doing business in a multinational setting.

Learning Outcomes of Options Pricing and Risk Management

  • Explain the difference between hedging, speculating, and arbitraging.
  • Explain the mechanics of options markets (i.e., how options markets are organized, what terminology is used, how contracts are traded, and how margin requirements are set.)
  • Discuss the factors affecting option prices using a number of different arbitrage arguments.
  • Implement trading strategies involving a single option on a stock and the stock itself as well as trading strategies involving a combination of options.
  • Use binomial trees to value options.
  • Describe and implement the concept of risk-neutral valuation to price options.
  • Describe and implement the Black-Scholes model to price options.
  • Discuss the role of corporate governance in shaping corporate financial performance.
  • Discuss the details and imbedded incentives of typical executive compensation plans.
  • Use option pricing models to value employee stock options.
  • Describe and implement the real options approach to value investment opportunities facing firms.
  • Demonstrate how corporations can use options, futures, forwards, and swaps to hedge their exposure to market risks.