STAT40930 Financial & Actuarial Maths II

Academic Year 2020/2021

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.

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Curricular information is subject to change

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.

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 learning 
Requirements, Exclusions and Recommendations

Not applicable to this module.


Module Requisites and Incompatibles
Not applicable to this module.
 
Assessment Strategy  
Description Timing Open Book Exam Component Scale Must Pass Component % of Final Grade
Examination: End of semester exam 2 hour End of Trimester Exam No Graded No

60
Continuous Assessment: Homework Throughout the Trimester n/a Graded No

20
Group Project: Group Project Throughout the Trimester n/a Graded No

20

Carry forward of passed components
No
 
Resit In Terminal Exam
Summer Yes - 2 Hour
Please see Student Jargon Buster for more information about remediation types and timing. 
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.