American Options and Wiener Processes Asynchronous Lecture

Finance 4366 will not meet in person tomorrow, Thursday, March 21, due to ongoing health-related issues in my family.  Therefore, tomorrow’s “American Options and Wiener Processes” lecture will be delivered asynchronously. As in past asynchronous lectures, class participation credit will be awarded to students who write and upload a lecture synopsis to Canvas, the deadline for which is Friday, March 22 by 5 pm.

In my March 19th lecture, we learned that the early exercise of an American call option may be optimal when the underlying asset pays dividends.  In this lecture, we finish our coverage of discrete-time financial modeling in which the passage of time is measured over distinct and separate intervals (ranging from seconds to days, months, or even years), and consider financial modeling in the more realistic continuous-time framework in which the passage of time occurs over infinitesimally small time intervals.  Hull’s “Wiener Processes and Ito’s Lemma” textbook chapter (the teaching note for which is available at is named after the two math/stat-based methods required to understand continuous-time finance, particularly the groundbreaking (and Nobel prize-winning) Black-Scholes-Merton model, which revolutionized the pricing of options and derivatives.

Tomorrow, I plan to be available for office hours via Zoom from 3:30-5, if any of my students would like to come by.

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