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MA30089: Stochastic processes & finance

Follow this link for further information on academic years Academic Year: 2015/6
Further information on owning departmentsOwning Department/School: Department of Mathematical Sciences
Further information on credits Credits: 6
Further information on unit levels Level: Honours (FHEQ level 6)
Further information on teaching periods Period: Semester 2
Further information on unit assessment Assessment Summary: EX 100%
Further information on unit assessment Assessment Detail:
  • Examination (EX 100%)
Further information on supplementary assessment Supplementary Assessment: MA30089 Mandatory Extra Work (where allowed by programme regulations)
Further information on requisites Requisites: Before or while taking this module you must take MA30125
Further information on descriptions Description: Aims:
To present the Black-Scholes-Merton approach to pricing financial derivatives, and the mathematical results which underpin this theory. To perform simple calculations to compute certain quantities relating to Brownian motion, and to understand how these quantities can be important in pricing financial derivatives.

Learning Outcomes:
On completing the course, students should be able to:
* Compute the prices of options in the one-period Binomial model;
* Explain how the principle of arbitrage can be used in determining the prices of derivative contracts;
* Define a Brownian motion, and determine basic properties of Brownian motion;
* Use the martingale property to find important quantities relating to Brownian motion;
* Apply the Black-Scholes formula to find the price of a European Call option.

Skills:
Numeracy T/F A
Problem Solving T/F A
Written and Spoken Communication F (in tutorials).

Content:
Discrete time: trading portfolio, Binomial model, arbitrage, derivative pricing using arbitrage. Radon-Nikodym derivative, change of measure, Fundamental Theorem of Asset pricing.
Brownian motion: definition, basic properties, reflection principle. Using related martingales, and computing quantitative properties of Brownian motion.
Sketch introduction to Stochastic Integration and stochastic differential equations. Ito's Lemma, Girsanov's Theorem.
Black-Scholes model: Geometric Brownian motion as a model for asset prices, risk-neutral measure, European call price formula, Fundamental Theorem of Asset pricing.
Further information on programme availabilityProgramme availability:

MA30089 is Optional on the following programmes:

Department of Mathematical Sciences
  • RSMA-AFM16 : Integrated PhD in Statistical Applied Mathematics
  • USMA-AFB15 : BSc(Hons) Mathematical Sciences (Year 3)
  • USMA-AAB16 : BSc(Hons) Mathematical Sciences with Study year abroad (Year 4)
  • USMA-AKB16 : BSc(Hons) Mathematical Sciences with Year long work placement (Year 4)
  • USMA-AFB13 : BSc(Hons) Mathematics (Year 3)
  • USMA-AAB14 : BSc(Hons) Mathematics with Study year abroad (Year 4)
  • USMA-AKB14 : BSc(Hons) Mathematics with Year long work placement (Year 4)
  • USMA-AFM14 : MMath(Hons) Mathematics (Year 3)
  • USMA-AFM14 : MMath(Hons) Mathematics (Year 4)
  • USMA-AAM15 : MMath(Hons) Mathematics with Study year abroad (Year 4)
  • USMA-AKM15 : MMath(Hons) Mathematics with Year long work placement (Year 4)
  • USMA-AKM15 : MMath(Hons) Mathematics with Year long work placement (Year 5)
  • USMA-AFB01 : BSc(Hons) Mathematics and Statistics (Year 3)
  • USMA-AAB02 : BSc(Hons) Mathematics and Statistics with Study year abroad (Year 4)
  • USMA-AKB02 : BSc(Hons) Mathematics and Statistics with Year long work placement (Year 4)
  • TSMA-AFM17 : MRes Statistical Applied Mathematics
  • TSMA-AFM09 : MSc Mathematical Sciences
  • TSMA-APM09 : MSc Mathematical Sciences
  • TSMA-AFM08 : MSc Modern Applications of Mathematics
  • TSMA-AWM14 : MSc Modern Applications of Mathematics
  • TSMA-AFM16 : MSc Statistical Applied Mathematics
  • USMA-AFB05 : BSc(Hons) Statistics (Year 3)
  • USMA-AAB06 : BSc(Hons) Statistics with Study year abroad (Year 4)
  • USMA-AKB06 : BSc(Hons) Statistics with Year long work placement (Year 4)

Notes:
* This unit catalogue is applicable for the 2015/16 academic year only. Students continuing their studies into 2016/17 and beyond should not assume that this unit will be available in future years in the format displayed here for 2015/16.
* Programmes and units are subject to change at any time, in accordance with normal University procedures.
* Availability of units will be subject to constraints such as staff availability, minimum and maximum group sizes, and timetabling factors as well as a student's ability to meet any pre-requisite rules.