Learning Outcomes:
Students can describe, derive, calibrate, apply and discuss limitations of a range of pricing and hedging models relating to interest rate, equity and foreign exchange risks.
Financial & Actuarial Maths II (STAT40930)
Curricular information is subject to change.
This module covers theory and applications of contingent claim pricing theory in both discrete and continuous time. We consider long and short positions and their uses in static hedging, with implications for pricing forward and option contracts.
Students consider the Cox-Ross-Rubinstein binomial model for equity prices. Using frictionless market assumptions, students construct dynamic hedges, using these to price European options. The equity cases is extended to the Ho-Lee model for interest rates and look at some exotic options (American and barrier options).
Moving to continuous time, we develop stochastic calculus, including Ito's formula. We apply this to pricing of various interest rate, equity and foreign exchange options in the context of the Black-Scholes, Garman-Kohlhagen, Merton and Vasicek models.
We investigate hedging in practice, including use of the `Greeks' (delta, gamma, theta, vega, rho and lambda).
Finally we apply contingent claim pricing theory to corporate structures and consider implications for project appraisal and investment strategy for insurance or pension funds.
Students consider the Cox-Ross-Rubinstein binomial model for equity prices. Using frictionless market assumptions, students construct dynamic hedges, using these to price European options. The equity cases is extended to the Ho-Lee model for interest rates and look at some exotic options (American and barrier options).
Moving to continuous time, we develop stochastic calculus, including Ito's formula. We apply this to pricing of various interest rate, equity and foreign exchange options in the context of the Black-Scholes, Garman-Kohlhagen, Merton and Vasicek models.
We investigate hedging in practice, including use of the `Greeks' (delta, gamma, theta, vega, rho and lambda).
Finally we apply contingent claim pricing theory to corporate structures and consider implications for project appraisal and investment strategy for insurance or pension funds.
About this Module
Student Effort Hours:
| Student Effort Type | Hours |
|---|---|
| Lectures | 24 |
| Tutorial | 12 |
| Autonomous Student Learning | 84 |
| Total | 120 |
Approaches to Teaching and Learning:
Lectures, tutorials, enquiry and problem-based learningRequirements, Exclusions and Recommendations
Not applicable to this module.
Module Requisites and Incompatibles
Not applicable to this module.Assessment Strategy
| Description | Timing | Component Scale | % of Final Grade | ||
|---|---|---|---|---|---|
| Assignment(Including Essay): Homework | Week 3 | Standard conversion grade scale 40% | No | 10 |
No |
| Assignment(Including Essay): Homework | Week 6 | Standard conversion grade scale 40% | No | 10 |
No |
| Group Work Assignment: Group project Students must have submitted two homeworks on time to be eligible. |
Week 11 | Standard conversion grade scale 40% | No | 20 |
No |
| Exam (Online): Two-hour online open-book exam (plus 30 minutes for upload) | End of trimester Duration: 2 hr(s) |
Standard conversion grade scale 40% | No | 60 |
No |
| Resit In | Terminal Exam |
|---|---|
| Summer | Yes - 2 Hour |
Feedback Strategy/Strategies
• Feedback individually to students, post-assessment
How will my Feedback be Delivered?
Individually corrected homeworks are returned at tutorials - you need to turn up to the tutorial to get your homework back and uncollected scripts are destroyed at the end of the semester.
Timetabling information is displayed only for guidance purposes, relates to the current Academic Year only and is subject to change.
| Spring | Lecture | Offering 1 | Week(s) - 20, 21, 22, 23, 24, 25, 26, 29, 30, 31, 32, 33 | Fri 12:00 - 12:50 |
| Spring | Lecture | Offering 1 | Week(s) - 20, 21, 22, 23, 24, 25, 26, 29, 30, 31, 32, 33 | Thurs 11:00 - 12:50 |