STATG017 - STOCHASTIC METHODS IN FINANCE

Aims of course:
To introduce mathematical concepts and tools used in the finance industry, in particular stochastic models and techniques used for financial modelling and derivative pricing.

Objectives of course:
On successful completion of the course, a student should have a good understanding of how financial markets work, be able to describe basic financial products, have a good knowledge of the basic mathematical and probabilistic tools used in modern finance, including stochastic calculus, and be able to apply the relevant techniques for the pricing of derivatives.

Applications:
The techniques taught in this course are widely used throughout the modern finance industry, including the areas of trading, risk management and corporate finance. They also have applications in other areas where investment decisions are made under uncertainty, for example in the energy sector where decisions on whether or not to build (i.e. invest in) new power plants are subject to uncertainty regarding future energy demand and prices.

Prerequisites:
Foundation Course (STATG000), or equivalent.

Course content
Financial markets, products and derivatives. The time value of money. Arbitrage Pricing. The binomial pricing model. Brownian motion and continuous time modelling of asset prices. Stochastic calculus. The Black-Scholes model. Risk-neutral pricing. Extensions and further applications of the Black-Scholes framework.

Texts
J.Hull, Options Futures and Other Derivative Securities (2000, Prentice Hall).
M.Baxter & A.Rennie, Financial Calculus (1996, Cambridge University Press).

Assessment for examination grading
Two-hour written examination in term 3.

Timetabled workload
Lectures: 2 hours per week in term 2.
Workshops: 2 two-hour classes in term 2.
Office hours, during which the lecturer will be available to discuss students' individual problems with the course, will be provided in term 2.