Division of International Studies
International Christian University
Readings in International Economy and International Management:
Applications in Option Pricing
Instructor: Nobuya Takezawa Office: ERB II 225
Class Hours: Thursday , 5th, 6th periods e-mail: firstname.lastname@example.org
Office Hours: Tuesday, 11:00-12:30
This course will serve as an introductory course in the application of option pricing
models. All applications will revolve around the celebrated Black-Scholes model. The
first half of the course will be devoted to gaining a basic understanding of the Black-
Scholes model from different perspectives. The course then proceeds to look at two sets
of applications: deposit insurance and credit risk analysis, and real options (for
valuation). We will also touch on executive stock options as this is a relatively “hot
issue” in Japan (and US), to date. The applications in this course are not necessarily in
traded options instruments that we find in the market. Instead, option pricing is used as
a tool to aid us in analyzing risk.
The course will be a mixture of lectures, presentation, and discussion. Active
participation in class discussion is highly encouraged. This course is intended for third
Required prerequisite: 1) One course in finance, 2) elementary statistics, 3) one
semester of calculus [or equivalent]
Recommended (additional) prerequisite: Additional courses in finance, courses in
microeconomics/price theory, advanced statistics (and probability, econometrics).
Evaluation is based on three parts:
1. Presentation (30%): You are asked to present papers and/or cases for a given topic
outlined below. Each presentation is followed by class discussion and a summary by
2. Research Paper [40%]. Write a summary/critique of a research paper(s) (article) of
your choice. Since we only cover a limited amount material (fundamental) in this
course, this project allows you to explore a topic in more depth or begin research in area
not covered in class. Details to be discussed in class. The paper is due beginning of
session 10. A short presentation of your findings/summary is required in session 10.
List of (possible) papers for review distributed in third week of class (topics include:
other real options, executive stock options, political risk, bonds, etc. )
3. Class Participation [30%] Active but constructive participation is encouraged during
lectures and discussion. Regular class attendance is part of the class participation
John Hull, Options, Futures, and other Derivatives, 4th edition.
The text is available at all major bookstores in the Tokyo area and through the website
(for example, Amazon Japan: amazon.co.jp). Recommend purchase of the paperback
edition. The fifth edition is currently available, however, readings from text outlined
below are based on the 4th edition. If you have access to an earlier edition that is fine.
Readings in Hull based on 4th edition.
Session 1: Introduction to Options (Lecture)
Reading: Hull Chapter 6 (background reading), Chapter 7, Chapter 13. 4 (delta hedging)
Session 2: The Dynamics of the Underlying Asset Price and the Fundamental PDE
Reading: Hull Chapter 10, Chapter 11
Session 3: The Black-Scholes Equation, Implied Volatilities, Greeks (Lecture)
Reading: Hull Chapter 12 (background reading), Chapter 11, Chapter 13 (concepts
only), Chapter 17.2 – 17.5
Session 4: The Binomial Tree (Presentation)
Reading: Hull Chapter 9, Chapter 16.1-16.5
Session 5: Executive Stock Options
L. Meulbroek, The Efficiency of Equity-linked Compensation: Understanding the Full
Cost of Awarding Executive Stock Options, Financial Management, 2001.
J. Carpenter, The Exercise and Valuation of Executive Stock Options, J. Financial
Session 6: Real Options (Presentation)
A. Damodoran, The Promise of Real Options, J. Applied Corporate Finance, 2000.
W.C. Kester, Today`s Options for Tomorrow`s Growth, Harvard Business Review, 1984.
L. Trigeorgis, Introduction and Overview (Chapter 1), Real Options, MIT Press,1996.
Laura Martin (Case)
Session 7: Valuation and Real Options (Presentation)
T. Luherman, Investment Opportunities as Real Options: Getting Started on the
Numbers, Harvard Business Review, 1998.
MW Petroleum (Case)
Session 8: Deposit Insurance (Presentation)
R. Merton, An analytic derivation of the cost of deposit insurance and loan guarantees,
J. Banking and Finance, 1977.
E. Ronn and A. Verma, Pricing risk-adjusted deposit insurance: an option based model,
J. Finance, 1986.
R. Sato, R. Ramachandran, B. Kang, Risk-adjusted deposit insurance of Japanese
Banks, in Japan, Europe, and International Financial Markets, eds. R. Sato, R. Levich,
R. Ramachandran, CUP, 1994.
Session 9: Credit Risk and the KMV model (Presentation)
森平 爽一郎、 信用リスクの測定と管理:：第三回」 証券アナリストジャーナル』
Session 10: Present Paper(s) of Choice
Research Paper Due Beginning of Session 10