|Year of offer||2017|
|Subject level||Graduate coursework|
|Fees||Subject EFTSL, Level, Discipline & Census Date|
The binomial model; risk-neutral pricing of derivative securities; introduction to Ito's formula and SDEs; stochastic asset models; Black-Scholes model; arbitrage and hedging; interest-rate models; actuarial applications.
Intended learning outcomes
On successful completion of this subject a student should be able to:
- Demonstrate a knowledge of the properties of option prices, valuation methods and hedging techniques, and be able to apply these;
- Show how to use binomial trees and lattices in valuing options;
- Apply the Ito calculus;
- Derive option prices under the Black-Scholes model;
- Describe and apply in simple models, including the binomial model and the Black-Scholes model, the approach to pricing using deflators and demonstrate its equivalence to the risk-neutral pricing approach;
- Demonstrate a knowledge of models of the term structure of interest rates;
- Describe, as a computational tool, the risk-neutral approach to the pricing of zero coupon bonds and interest-rate derivatives for a general one-factor diffusion model for the risk-free rate of interest;
- Demonstrate a knowledge of simple models for credit risk.
High level of development:
- Written communication;
- Problem solving;
- Mathematical reasoning;
- Simple models of credit risk;
- Application of theory to practice;
- Interpretation and analysis.