Dr Rohit Rahi

This course is compulsory on the BSc in Finance and BSc in Financial Mathematics and Statistics. This course is available on the BSc in Accounting and Finance, BSc in Econometrics and Mathematical Economics, BSc in Economics, BSc in Mathematics and Economics, BSc in Mathematics, Statistics and Business and Diploma in Accounting and Finance. This course is available with permission as an outside option to students on other programmes where regulations permit and to General Course students.

This course is not capped; any eligible student that requests a place will be given one.

Students must have completed Principles of Finance (FM212 or FM213). Mathematical Methods (MA100) is recommended but not required. Students who have not taken MA100 or equivalent are advised to do some pre-reading (see "Indicative reading" below). Students who have not taken Principles of Finance (FM212 or FM213), but have an excellent quantititative background, may be allowed to take this course at the discretion of the course leader.

This course is intended for third-year undergraduates and builds upon FM212/FM213 Principles of Finance. It focuses on derivatives, with a particular emphasis on equity derivatives (standard call and put options, exotic options), futures and forward contracts, and interest rate derivatives (swaps, caps and floors, swaptions). It systematically addresses three basic questions: how do these products work, i.e. what are their payoffs? How can they be used, for hedging purposes or as part of trading strategies? And above all: how are they priced? The course emphasises a small number of powerful ideas: absence of arbitrage, replication, and risk-neutral pricing. These are typically introduced in the context of discrete-time models, but the course also covers some well-known continuous-time models, starting with a comprehensive treatment of the Black-Scholes model. The level of mathematics is appropriate for third-year students with a solid quantitative background.

20 hours of lectures in the WT.

This course is taught in the interactive lecturing format. There is no distinction between lectures and classes/seminars; there are “sessions” only, and the pedagogical approach in each session is interactive.

Exercises will be discussed in class each week. Students will be expected to make positive contributions to class discussion.

There is no required textbook, but the following is an excellent reference: John C Hull, Options, Futures, and Other Derivatives.

The following pre-reading is recommended for students who have not taken Mathematical Methods (MA100) or equivalent:

Martin Anthony and Michele Harvey, Linear Algebra: Concepts and Methods

Chapter 5: Vector Spaces

Chapter 6: Linear Independence, Bases and Dimension

Ken Binmore and Joan Davies, Calculus, Concepts and Methods

Section 5.7: Taylor series for scalar valued functions of n variables

Exam (90%, duration: 2 hours, reading time: 15 minutes) in the spring exam period.
Coursework (10%) in the WT.