# MST30030 Financial Mathematics

This module introduces financial and commodity derivatives markets and their most commonly traded securities. Securities such as forwards, futures and options have been traded on exchanges, as well as ‘over the counter’, for decades. The emphasis of this module is on the pricing of such derivative securities. We start by looking at future and forward contracts to understand their properties and differences and determine how to value them. After a detailed study of the different types of options, the valuation method of binomial trees (based on the Cox, Ross and Rubenstein paper of 1979) is discussed. We then study the model of a share price evolution introduced by Black, Scholes and Merton in 1973, and derive the Black-Scholes model for valuing European call and put options on a non-dividend-paying stock. A brief introduction to probability theory is also provided in the course.

Show/hide contentOpenClose All

Curricular information is subject to change

Learning Outcomes:

On completion of this module the student should be able to:
- Define what is meant by Forward and Future contract, describe their properties and their differences, determine their price.
- Define what is meant by European and American call and put options and describe their properties.
- Describe the Binomial Tree Method of pricing options and apply it to price a given option under certain conditions.
- Describe in detail the model of stock price behavior assumed by Black, Scholes and Merton.
- Derive the Black-Scholes model for valuing European call and put options on a non-dividend-paying stock.

Student Effort Hours:
Student Effort Type Hours
Lectures

24

Tutorial

12

Specified Learning Activities

24

Autonomous Student Learning

40

Total

100

Approaches to Teaching and Learning:
Lectures, tutorials, enquiry and problem-based
Requirements, Exclusions and Recommendations
Learning Requirements:

Students should have a knowledge of introductory analysis (e.g. MST20040) and should have completed a course in the Calculus of Several Variables at the level of MATH20060.

Learning Recommendations:

STAT20110

Module Requisites and Incompatibles
Not applicable to this module.

Assessment Strategy
Description Timing Open Book Exam Component Scale Must Pass Component % of Final Grade
Continuous Assessment: Varies Varies over the Trimester n/a Standard conversion grade scale 40% No

25

Examination: Final Examination 2 hour End of Trimester Exam No Standard conversion grade scale 40% No

75

Carry forward of passed components
No

Resit In Terminal Exam
Autumn Yes - 2 Hour