About this document

These lecture notes are prepared for the Master's course ECN124: Financial Derivatives. I have started writing them during the year 1999-2000 at Queen Mary, University of London. These are not exhaustive by no means: one should consult [at least] the textbooks described below to ensure a satisfactory knowledge of the subject.

I try to keep these lecture notes up-to-date. Research on derivatives has been thriving during the last few [hmmm... perhaps more than few...] years. Of course the purpose is not to cover all individual models, but rather to offer an overview and the means for someone to carry out her own research.

In 2000-1 I gave some extra lectures on topics that students exhibited interest about, namely (1.) Credit risk, (2.) Market crashes and models with stochastic jumps, and (3.) Value at risk [VaR]. For these topics separate handouts were given.

In 2001-2 I included models with changing volatilities and jumps. These are a generalization of the handouts distributed the year before. In addition a number of computer code segments were also distributed.

In 2002-3 I included a number of MATHEMATICA segments of computer code. Although these can be used directly, MATHEMATICA was used for the clarity of exposition it renders; allowing one to understand the mechanics of programming. Programming is an integral part of modern finance, and students are encouraged to use these snippets, or translate them in the language of their choice. You can contact me if you need a CD with the code. Sections that include MATHEMATICA code are signified by the icon MMA: . Each section is self sufficient, in the sense that it will run if pasted directly.

At a number of points in the text the sign is used. This does NOT signify that this particular point is more important, that it is more likely to appear in an exam, etc. It just means that students tend to make mistakes on this particular matter. It is very unfortunate that this paragraph has to be the first one that bears the very same mark...

This document has been typeset in L^ATEX2_e. Most of the figures have been constructed using the PostScript language and TEXdraw. Most diagrams have utilized the tree-dvips macros package. A number of graphs produced by MATHEMATICA have been also used. If you like what you see and you want to typeset your MSc. thesis in L^ATEX, let me know to help you with providing the relevant software [everything that this thesis has used for typesetting is freeware. A full version of MATHEMATICA will cost you around $\pounds 100$ while you are a student and around $\pounds 1300$ afterwards]. You should do that quite early, since it takes some time to familiarize one's self to the use of the software.