Advanced Financial Mathematics (ACTL30009)

Intended learning outcomes

On completion of this subject, students 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.

Generic skills

• High level of development: written communication; problem solving; mathematical reasoning; application of theory to practice; interpretation and analysis.