MATH 425: The Mathematics of Contingent Claims

Fall 2023

Course homepage: Canvas


The mathematical theory associated with asset price dynamics; binomial pricing models; Black-Scholes analysis; hedging; volatility smile; implied volatility trees; implied binomial trees. Prerequisites: MATH 172 or equivalent; MATH 308 or equivalent; basic probability.


Understand basic types of options and the use of spreads to achieve a given payoff; know about the mathematical theory associated with asset price dynamics, understand volatility; be able to use binomial pricing models and Black-Scholes analysis; understand hedging process.


3 credits


Lecture notes and exercise sheets will be posted on the class homepage. Optionally, one can study using the following textbooks:


Dr Gregory Berkolaiko, Blocker 625c.


TR 9:35-10:50, BLOC 128.


Mondays 3-4, Fridays 11-noon and by appointment.


Optional midterm exam: Thursday, Oct 19 (regular class time and place). Final exam: Thursday, December 7, 12:30-2:30 in our regular classroom. Exam submissions will be done through Gradescope.


Around 4-5 quizzes, based on the homework, taking place on the homework due date. They will not be announced in advance.

There may also be pop quizzes, whose grades will be added to the pool of Quiz/HW grades.


Homework is posted on the course homepage, approximately bi-weekly. At least one homework will involve working with stock market data (Matlab recommended). All homework submissions will be done through Gradescope.

Homework grade may be adjusted downward if the subsequent quiz performance is 50% lower than the score on the corresponding homework problem. Any disputes will be adjudicated by the Aggie Honor Council.


Exams, homework and quizzes will be in "show full work" format. Homework must be submitted through Gradescope. Rules:

Some tips:


The following grade breakdown will be used:

Grade Percentage   Grade Ingredients:
A 85% and more Midterm (optional: 30%)
B 75% and more Homeworks and Quizzes 20%
C 65% and more Final exam 80% (if the midterm is taken: 50%)
D 55% and more
F less than 55%


Make-ups for missed quizzes: can be done at any regularly scheduled office hours. No documentation is needed unless the instructor feels this generous policy is being abused. Midterm is optional and no make-up will be given; the final serves as the automatic make-up for the midterm missed for any reasons. Missed final will result in an F (unexcused absence) or Incomplete (excused absense). Homework extensions will be granted for a university approved absence that could not be foreseen; please submit your excuse by email (see Rule 7).


Sometimes the instructor or the grader might make a mistake grading your work. If you feel that this has happened, you have one week since the graded work was handed back to you to talk to the instructor. If a mistake is confirmed, the grade will be changed. No complaints after that deadline will be considered.


Copying work done by others, either in-class or out of class, is an act of scholastic dishonesty and will be prosecuted to the full extent allowed by University policy. Collaboration on assignments, either in-class or out-of-class, is forbidden unless permission to do so is granted by your instructor. For more information on university policies regarding scholastic dishonesty, see University Student Rules.


Whenever doing assignments it is always a good practice to cite the sources of formulas, ideas etc. In this class, there are three types of sources.

  1. Authorized material: material that is explicitly allowed to use for completion of assignments: lecture notes, recommended books, Wikipedia.
  2. Forbidden (unauthorized) material: past years' homework solutions; book authors' solutions and solution manuals. Using those as an aid in completing assignments will be prosecuted to the full extent.
  3. Unassessed material: material that is neither authorized nor explicitly forbidden (yet). You must reference the material that you use. You must be prepared to furnish a copy for inspection. It may be subsequently declared unauthorized, but such prohibition will not affect anyone retroactively.


"An Aggie does not lie, cheat, or steal or tolerate those who do." See:


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This file was last modified on Monday, 21-Aug-2023 18:10:11 CDT.