1. General Information Dr. Honaida Malaikah PhD. financial mathematics office 3009/ office hours : 11-1 Sunday, Monday, Tuesday Test 1: Sunday 21/11/1433 -25% Test 2: Sunday 11/1/1434- 25 % Final exam 40 % -- home works, tasks 10%

2. Text books: J.Hull : Option, Futures and other derivativs, 5 th edition, prentice hall 2003 P. Wilmott, S. Howison, J. Dewynne: The mathematics of financial derivatives, cambridge university press, 1995.

3. Elementary Economics Background: Stock Market: such as NYSE (New York Stock Exchange), London stock exchange, Tokyo.... Bond Market: where participant buy and sell debit securities. Futures and Option Market: where the derivative products are traded. Derivative: is a financial instrument whose value depends on the more basic underlying variables ( the price of traded asset).

4. Elementary Economics Background: Forward contract : is a simple derivative, It is an agreement to buy or sell an asset at a certain future date (expiration date or maturity T) for a certain price ( the strike price, exercise price K,E) One of the parties to a forward contract assumes the long position and agrees to buy the asset. The other party assumes a short position and agrees to sell the asset.

5. Forward contract Example: Consider the forward contract which trade one share of asset in one year (T) for a price 1000$ (K) The pay off (1) : Long position: S(T) –K Short position:K- S(T) ---------------------------------------------------------------- (1)The cash realized by the holder of a derivative at the end of its life.

6. options: Option: Call, Put Call option C: gives the holder the right to buy the underlying asset for a certain price K at a certain date T. Put option P: : gives the holder the right to sell the underlying asset for a certain price at a certain date. To close the option the investor has to do the opposite transaction.

7. options: American option can be exercised at any time up to the maturity, European option can be exercised only at maturity itself. Example: Call option: consider the situation of an investor who buy a European call option with a strike price 1000$ to purchase one share. The current stock price 800$, the expiration date is one year and the price of an option to purchase one share (deposit, initial payment) is 100$.

8. Options: The pay off from the call option: max (S(T)-K, 0) If S(T) > K : S(T) –K If S(T)< K : 0 Put option: consider the situation of an investor who has a European put option with a strike price 1000$ to purchase one share. The expiration date is one year and the price of an option to purchase one share (deposit, initial payment) is 100$.

9. Options: The pay off from the put option: max (K-S(T), 0) If S(T) > K : 0 If S(T)< K : K-S(T) whereas the purchase of a call option is hoping the stock price will increase, the purchase of a put option is hoping that it will decrease.