Dr Erik Baurdoux COL.6.04

This course is available on the BSc in Actuarial Science, BSc in Data Science and BSc in Mathematics, Statistics and Business. This course is available as an outside option to students on other programmes where regulations permit and to General Course students.

Students must have completed:

EITHER Probability, Distribution Theory and Inference (ST202) OR Probability and Distribution Theory (ST206)

AND Stochastic Processes (ST302).

Theories of financial market behaviour. 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.

Introduction to financial markets. Model-free relationships.

Stochastic models for security prices and interest rates 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.

This course will be delivered through a combination of lectures and seminars totalling a minimum of 60 hours across Autumn Term and Winter Term.

This course does not include a reading week in the Autumn Term but includes a reading week in Week 6 of Winter Term.

Students will work on and submit formative coursework towards the end of Autumn term and a second set of formative coursework towards the end of Winter term. Feedback and solutions will be provided.

Two sets of hand-in exercises will also be given during the year. 

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 (90%, duration: 3 hours) in the spring exam period.
Coursework (10%) in the period between WT and ST.