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.

Click Here for Video Transcript

MICHAEL CICHELLO: I see options-- everywhere. You probably weren't expecting one word in that sentence-- options. But after taking this course, I expect you will.

Writing a book gives the author not only the rights to proceeds from the book, but also the rights to future movies that might come from the book's ideas. Investing in the next phase of drug trials gives pharmaceuticals the right to invest, or not, in future trials. Having the ability to hedge against currency changes is an option available to multinational firms.

In this course, we'll enhance your ability to spot options, to understand options and other derivative securities, and to develop the tools to value them. Once you have experience working with options, we'll transition to evaluating other derivatives, such as forwards, futures, and swaps. We'll analyze how to use these to manage your firm's operating risks. I look forward to taking you through this discovery process. Keep your eyes open for those options.