I have added everyone’s Midterm Exam 2 grades to the Finance 4366 Gradebook on Canvas. Here are the descriptive statistics for Midterm Exam 2:

# Merton: Applications of Option-Pricing Theory (shameless self-promotion alert)…

Now that we are well into our study of the famous Black-Scholes-Merton option pricing formula, it’s time for me to shamelessly plug a journal article that I published early in my academic career which Robert C. Merton cites in his Nobel Prize lecture (Merton shared the Nobel Prize in economics in 1997 with Myron Scholes “for a new method to determine the value of derivatives”).

Here’s the citation (and link) to Merton’s lecture:

Merton, Robert C., 1998, Applications of Option-Pricing Theory: Twenty-Five Years Later, *The American Economic Review*, Vol. 88, No. 3 (Jun. 1998), pp. 323-349.

See page 337, footnote 11 of Merton’s paper for the reference to Neil A. Doherty and James R. Garven (1986)… (Doherty and I “pioneered” the application of a somewhat modified version of the Black-Scholes-Merton model to the pricing of insurance; thus Merton’s reference to our *Journal of Finance *paper in his Nobel Prize lecture)…

# Teacher evaluations for the courses (including Finance 4366) in which you are enrolled this semester

By now, you should have received an email inviting you to complete teacher evaluations for the courses (including Finance 4366) in which you are enrolled this semester.

At Baylor, your professors are given annual evaluations concerning quality of teaching, research, and service. These evaluations are based in part upon teacher evaluations provided by students. Thus, by completing teacher evaluations, you provide the University with important and valuable information that may affect not only faculty compensation and promotion/tenure decisions, but also provide faculty with useful information concerning ways to improve teaching. Thus, I encourage you to not only complete your teacher evaluation for Finance 4366, but also for the other courses in which you are enrolled.

# Senior Appreciation Dinner – RSVP today!

# Solutions for the risk neutral valuation problems that we covered in class today

See link below:

# The plan for tomorrow’s class meeting

The plan for tomorrow’s class meeting is to pick up from where we left off last Thursday. Specifically, we will continue our analysis of risk neutral valuation in continuous time by pricing the derivatives which are described in the PDF file linked below, and showing how these equations confirm the Black-Scholes-Merton partial differential equation. So tomorrow’s class meeting will be a bit on the “mathy” side, but well worth it since, as I have previously pointed out, the Black-Scholes-Merton equation can be used to price virtually any financial derivative that you can possibly ever think of.

# Midterm 2 exam booklet and solutions…

- The Finance 4366 Midterm 2 exam booklet is available at http://fin4366.garven.com/spring2018/midterm2_spring2018.pdf.
- The Finance 4366 Midterm 2 exam solutions are available at: http://fin4366.garven.com/spring2018/midterm2_spring2018_solutions.pdf.

# Erratum (More Wiener Processes Practice Problems (Solutions))

It has been called to my attention that in Problem 2 of the solutions for the Wiener Processes Practice Problems, I inadvertently conflated variance with standard deviation; I have corrected this error, and of course this results in a very different, but correct risk assessment of the odds of *S* < 0 (the correct probability being 1.04%. I have replaced the original document with a document which reflects this correction.

Let me assure everyone that the level of control for tomorrow’s midterm exam is impeccable – not to worry! 🙂

# Erratum (Problem 3, Fall 2017 Midterm 2 Solutions)

In case if any of you were having difficulty following the solutions for Problem 3 from the Fall 2017 Midterm 2 Solutions document, this is because I apparently managed to butcher some basic algebra when I wrote that document last fall. The good news is that all of the answers which were given in that document were correct; it just that the expressions for the “*a*” and “*q*” parameters were incorrectly written.

The corrected version of the Fall 2017 Midterm 2 Solutions document is now available for downloading from the following link: http://fin4366.garven.com/spring2018/midterm2_fall2017_solutions.pdf.

# The solutions for problem set 8…

… are available at http://fin4366.garven.com/spring2018/ps8solutions.pdf…