Prof Pauline Barrieu COL 6.03

This course is compulsory on the BSc in Actuarial Science. This course is available on the BSc in Business Mathematics and Statistics and BSc in Statistics with Finance. This course is not available as an outside option. This course is available to General Course students.

Students must have completed Probability, Distribution Theory and Inference (ST202) and Stochastic Processes (ST302).

Applications of stochastic processes and actuarial models in finance. Utility theory. Stochastic dominance and portfolio selection. Measures of investment risk. Mean-variance portfolio theory. Single and multifactor models. The Capital Asset Pricing Model. The efficient market hypothesis. Stochastic models for security prices and estimating their parameters. Option pricing: general framework in discrete and continuous time, the Black-Scholes analysis and numerical procedures (binomial models and Cox-Ross-Rubinstein models).The term structure of interest rates: the Vasicek, the Cox-Ingersoll-Ross and other models.  Introduction to credit risk.

20 hours of lectures and 10 hours of seminars in the MT. 20 hours of lectures and 10 hours of seminars in the LT.

Written answers to set problems will be expected on a weekly basis.

N H Bingham & R Kiesel, Risk Neutral Valuation; A Cerny, Mathematical Techniques in Finance: Tools for Incomplete Markets; J Hull, Options, Futures & Other Derivatives; R Jarrow & S Turnbull, Derivative Securities; D Luenberger, Investment Science; Institute of Actuaries core reading notes, Subject CT8.

Exam (100%, duration: 3 hours) in the main exam period.