A Course in Derivatives using My Teaching Notes

Many people ask me about a formal set of readings to learn about options and derivatives at a reasonably rigorous level. Of course, a book is the best route to take. A book is written in a logical order, building on itself, and using consistent notation. I certainly recommend my book and that of John Hull and others as a better approach, but I have here an alternative. These teaching notes, which are on my Instructional web page were written from time to time over my career to help my own students. I have received numerous compliments from all over the world for these notes. They were written, however, in no particular order. If I felt a topic needed a note, I would write one. When people ask me what to read, I often point to these, because they are free (even though I would love for you to buy my books). My new research assistants are always pointed to this page from the first day. I finally decided, however, that the page was haphazardly organized and that with a little work, I could assemble these into a logical order, one in which the material starts off low and builds. That is what this page is for. I cannot guarantee the order is perfect, but it should be close to optimal. If you have any suggestions for re-ordering or new notes that fill in gaps, let me know.

Thus, if you want to learn derivatives, take these in order.

*Mathematical, Statistical, and Economic Foundations*- Teaching Note 99-03: Mathematics Review for Finance (July 23, 2008)
- Teaching Note 99-04: Probability and Statistics Review for Finance: Part I (July 18, 2008)
- Teaching Note 00-06: Probability and Statistics Review for Finance: Part II (July 18, 2008)
- Teaching Note 97-01: The Normal Probability Distribution (July 18,2008)
- Teaching Note 97-05: The Bivariate Normal Probability Distribution (July 23, 2008)
- Teaching Note 09-01: Basic Concepts in Valuing Risky Assets and Derivatives (November 29, 2010)
- Teaching Note 99-01: Solving Linear Equations in Excel (August 21, 2008) (optional)
- Teaching Note 07-01: The Bernoulli Paradox (July 23, 2008) (optional and probably not necessary for this course of study)

*Option Pricing*- Teaching Note 97-10: An Overview of Option Trading Strategies: Part I (August 22, 2008)
- Teaching Note 97-11: An Overview of Option Trading Strategies: Part II (August 22, 2008)

- Teaching Note 99-05: Rational Rules and Boundary Conditions for Option Pricing (July 25, 2008)
- Teaching Note 96-04: Modeling Asset Prices as Stochastic Processes I (July 18, 2008)
- Teaching Note 00-03: Modeling Asset Prices as Stochastic Processes II (July 8, 2008)
- Teaching Note 96-05: Ito's Lemma and Stochastic Integration (July 18, 2008)
- Teaching Note 99-02: Derivation and Interpretation of the Black-Scholes Model (June 3, 2011)
- Teaching Note 97-12: Calculating the Black-Scholes Value (August 21, 2008)
- Teaching Note 00-04: Girsanov's Theorem in Derivative Pricing (July 18, 2008)
- Teaching Note 00-07: The Reflection Principle in Finance (October 5, 2010) (optional)
- Teaching Note 98-04: Exchange Option Pricing (August 29, 2011)
- Teaching Note 00-01: Linear Homogeneity, Euler's Rule, The Black-Scholes Model, and an Application to Forward-Start Options (July 25, 2008)
- Teaching Note 98-05: Compound Option Pricing (July 18, 2008)
- Teaching Note 98-02: Analytic Approximation of American Option Prices: Barone-Adesi-Whaley (July 18, 2008)

- Teaching Note 98-01: Closed-Form American Call Option Pricing: Roll-Geske-Whaley (July 24, 2008)
- Teaching Note 98-03: Closed-Form American Put Option Pricing: Geske-Johnson (July 18, 2008)
- Teaching Note 98-06: Rainbow (Min-Max) Option Pricing (July 18, 2008)
- Teaching Note 97-13: Option Prices and State Prices (July 18, 2008)
- Teaching Note 96-02: Risk Neutral Pricing in Discrete Time (July 24, 2008)
- Teaching Note 00-05: Brownian Motion: From Discrete to Continuous Time (July 12, 2010)
- Teaching Note 00-08: Convergence of the Binomial to the Black-Scholes Model (July 8, 2008)
- Teaching Note 05-02. Calculating the Greeks in the Binomial Model (June 10, 2010)
- Teaching Note 96-03: Monte Carlo Simulation (January 11, 2011)
- Teaching Note 97-02: Option Pricing Using Finite Difference Methods (August 21, 2008)
- Teaching Note 03-01: Option Prices and Expected Returns (August 7, 2008)
- Teaching Note 04-01: The Volatility Smile (August 7, 2008)
- Teaching Note 11-01: The Isomorphism of Foreign Currency Calls and Puts (January 6, 2011)

*Other Topics and Applications*- Teaching Note 01-01: Zero Coupon Bond Prices and Interest Rate Quotation Conventions (August 15, 2008)
- Teaching Note 01-02: Introduction to Interest Rate Options (August 15, 2008).
- Teaching Note 97-03: The Vasicek Term Structure Model (August 7, 2008)
- Teaching Note 97-04: The Cox-Ingersoll-Ross Term Structure Model (August 7, 2008)
- Teaching Note 97-14: Binomial Pricing of Interest Rate Derivatives (August 15, 2008)
- Teaching Note 02-01: The Heath-Jarrow-Morton Term Structure Model (August 19, 2008)
- Teaching Note 00-02: The Local Expectations Hypothesis (August 15, 2008)
- Teaching Note 05-01: The Pricing and Interest Sensitivity of Floating-Rate Securities (August 19, 2008)
- Teaching Note 05-03: A Generalization of the Cost of Carry Forward/Futures Pricing Model (August 20, 2008)
- Teaching Note 97-06: Pricing and Valuation of Interest Rate and Currency Swaps (December 2, 2009)
- Teaching Note 97-08: Pricing and Valuation of Commodity Swaps (August 19, 2008)
- Teaching Note 97-15: Pricing and Valuation of Equity Swaps (August 20, 2008)
- Teaching Note 97-07: Value-at-Risk (VaR) (August 22, 2008)
- Teaching Note 96-01: Default Risk as an Option (July 18, 2008)
- Teaching Note 97-09: Credit Derivatives (August 22, 2008)
- Teaching Note 09-02: Understanding the Cash Flows in Collateralized Debt Obligations (December 17, 2009)

*Last updated: May 27, 2012*