Important announcement: we will meet synchronously tomorrow via Zoom for our regularly scheduled 11-12:15 class session

Finance 4366 (Options, Futures, and Other Derivatives) will meet synchronously tomorrow via Zoom for our regularly scheduled 11-12:15 class session.  We’ll devote our attention to a (very) brief review of my recorded lecture about the replicating portfolio approach for pricing forward/futures contracts and devote most of our time to a discussion of the replicating portfolio approach for pricing call and put options.

If you haven’t already watched my recorded lecture, be sure to do so prior to tomorrow’s class; that lecture introduces the replicating portfolio approach to pricing forwards and futures, based on the lecture note at http://fin4366.garven.com/spring2021/lecture6.pdf.  Tomorrow, we will focus attention on the “Pricing Options” lecture note (at http://fin4366.garven.com/spring2021/lecture6a.pdf).

Extra Credit Opportunity: The GameStop Squeeze – Lessons for Investors and Firms

This Thursday, February 11th, from 12:30-1:30 pm CT, three of my Finance colleagues – Dr. Shane Underwood, Dr. Mike Stegemoller, and Dr. Erik Davidson, will present a panel discussion of what can be learned from recent events in the market for GameStop stock.  I have previously blogged about the GameStop trading debacle at http://derivatives.garven.com/2021/01/31/the-real-force-driving-the-gamestop-revolution, so review that posting for further context prior to attending this webinar.

Please find additional details below:

Date: Thursday, Feb. 11
Time: 12:30-1:30 pm CST
Featured Speakers:

This Webinar, scheduled for 12:30-1:30 pm CST on Thursday, February 11th, requires registration: Please register at this link

Since this panel discussion has the makings of an extra-credit opportunity for Finance 4366, let’s have it! You can earn extra credit by attending (via Zoom) and reporting on what you learn. If you decide to take advantage of this extra-credit opportunity, I will use the grade you earn on your report to replace your lowest quiz grade in Finance 4366 (assuming that your grade on the extra credit is higher than your lowest quiz grade). Submit your report as a (PDF formatted) 1-2 page executive summary. In order to receive credit, the report must be uploaded to the Assignments section of the Course Canvas page by no later than 5 pm CST on Monday, February 15 (Click on the Assignment entitled “GameStop Extra Credit Webinar – Thursday, 2/11, 12:30-1:30”).

A Random Walk Down Wall Street

If you were to read only one book about finance, it would have to be “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” by Burton G. Malkiel. Malkiel’s book (now in its 12th edition) provides a compelling argument in favor of efficient markets theory and investing in (passively managed) index funds.

The efficient market theory implies that stock prices follow a random walk. These ideas were originally conceived of by Professors Paul Samuelson and Eugene Fama in the 1960s, and subsequently popularized by folks like Professor Malkiel. In Finance 4366, we rely extensively upon the notion that prices of speculative assets (e.g., stocks, bonds, commodities, foreign exchange, etc.) follow random walks as we consider the technical details associated with pricing and hedging risk using financial derivatives.

Extra Credit Opportunity: Retail Investors Shake Up Wall Street, What’s Next?

Retail investors have shaken up Wall Street with their activities on Reddit and Robinhood affecting the stock price of GameStop, AMC, and other assets. The Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business will be holding a webinar on Friday, Feb. 5, 2021, to discuss the implications of recent events and the possible regulatory responses.

The Center for Financial Markets and Policy at the Georgetown University McDonough School of Business is bringing together academics and industry professionals to discuss: What’s next for retail and institutional investors? What regulatory changes can we expect? What are the implications for the democratization of finance?

Please find additional details below:

Date: Friday, Feb. 5
Time: Noon to 1 p.m. EST

Featured Speakers (L to R): Prof. Chester Spatt, Carnegie Mellon University Tepper School of Business; Guy Adami, CNBC; Professor Pete Kyle, University of Maryland’s Robert H. Smith School of Business; and Prof. Reena Aggarwal, Georgetown University’s McDonough School of Business.

This Webinar, scheduled for 11 am – 12 noon CST on Friday, February 5th requires registration: Please register at this link.

Since this panel discussion has the makings of an extra-credit opportunity for Finance 4366, let’s have it! You can earn extra credit by attending (via Zoom) and reporting on what you learn. If you decide to take advantage of this extra-credit opportunity, I will use the grade you earn on your report to replace your lowest quiz grade in Finance 4335 (assuming that your grade on the extra credit is higher than your lowest quiz grade). The report should be in the form of a (PDF formatted) 1-2 page executive summary. In order to receive credit, the report must be uploaded to the Assignments section of the Course Canvas page by no later than 5 pm CT on Monday, February 7 (Click on the Assignment entitled “Center for Financial Markets and Policy Extra Credit Opportunity”).

Finance 4366 Grades on Canvas

I just finished posting Finance 4366 numeric course grades to Canvas.  To date, grades have been assigned for four class meetings, two quizzes, a student survey, and one problem set. Each class attendance (absence) receives a grade of 100 (0); I assigned a grade of 100 for all surveys completed by January 21st, and these grades are included under the Problem Set category, along with the grade earned on Problem Set 1. Since we have had no exams yet, I calculated the current (February 1st) course numeric grade using the following equation:

(1) Current (February 1, 2021) Course Numeric Grade = (.10(Class Attendance) +.10(Quizzes) +.20(Problem Sets))/.4

Or course, equation (1) is a special case of the final course numeric grade equation (equation (2) below) which also appears in the course syllabus:

(2) Final Course Numeric Grade =.10(Class Attendance) +.10(Quizzes) +.20(Problem Sets) + Max{.20(Midterm Exam 1) +.20(Midterm Exam 2) +.20(Final Exam),.20(Midterm Exam 1) +.40(Final Exam),.20(Midterm Exam 2) +.40(Final Exam)}

As the spring semester progresses and I continue to collect grades in the attendance, quiz, problem set, and exam categories, then the course grade on Canvas will dynamically incorporate that information on a timely basis for each student. After I record midterm 1 grades, I will apply equation (3) below (also a special case of equation (2) above) to determine your numeric course grade at that point in time:

(3) Course Numeric Grade after Midterm 1 = (.10(Class Attendance) +.10(Quizzes) +.20(Problem Sets) +.20(Midterm 1))/.6

After I record midterm 2 grades, I will apply equation (4) below (also a special case of equation (2) above) to determine your numeric course grade at that point in time:

(4) Course Numeric Grade after Midterm 2 = (.10(Class Attendance) +.10(Quizzes) +.20(Problem Sets) +.20(Midterm 1) +.20(Midterm 2))/.8

After I record final exam grades, I will use equation (2) above to determine your final course numeric grade, and (as also noted in the course syllabus), the final course letter grade will be based upon the following schedule of final course numeric grades:

A 93-100% C 73-77%
A- 90-93% C- 70-73%
B+ 87-90% D+ 67-70%
B 83-87% D 63-67%
B- 80-83% D- 60-63%
C+ 77-80% F <60%

 

The Real Force Driving the GameStop Revolution

Jason Zweig’s Intelligent Investor article referenced below, entitled “The Real Force Driving the GameStop Revolution” should be required reading for all students of finance. Among other things, the article provides its readers much needed historical context for last week’s GME, AMC, and Blackberry bubbles!
wsj.com
Individual traders banded together this past week to move markets like never before. But the buildup to this remarkable moment has been happening for decades.

Problem Set 2 helpful hints

Problem Set 2 is available from the course website at http://fin4366.garven.com/spring2021/ps2.pdf; its due date is Thursday, February 4.

Problem Set 2 consists of two problems. The first problem requires calculating expected value, standard deviation, and correlation, and using this information as inputs into determining expected returns and standard deviations for 2-asset portfolios. The second problem involves using the standard normal probability distribution to calculate the probabilities of earning various levels of return by investing in risky securities and portfolios; see pp. 17-23 of the http://fin4366.garven.com/spring2021/lecture4.pdf lecture note for coverage of that topic.

The 17 equations that changed the course of history (spoiler alert: we use 4 of these equations in Finance 4366!)

I especially like the fact that Ian Stewart includes the famous Black-Scholes equation (equation #17) on his list of the 17 equations that changed the course of history; Equations (2), (3), (7), and (17) play particularly important roles in Finance 4366!

From Ian Stewart’s book, these 17 math equations changed the course of human history.