OverviewThe module develops skills in asset pricing and an understanding of the theoretical basis of the theory behind it. The module requires knowledge of some mathematical techniques but stresses practical training in asset pricing with a focus on the intuitions and heuristics behind theorems and formulae, rather than their rigorous derivations and semantic definitions.
There are three key topics; (i) investors' optimisation, (ii) discrete time models and (iii) option Greeks and option strategies. For (i), the module first introduces the basic financial economics, and, based on it, we establish the basis of the risk-neutral probability. For (ii), the module discusses how to construct the tree model based on the historical price data, and shows that the model can be used to find the fair prices of a wide range of financial derivatives. For (iii), the module investigates the Black-Scholes-Merton (BSM) formula, and then how to use it to find the optimal hedge ratio for delta hedging. In this respect, the module also discusses how to use the return correlations to find the optimal hedge ratio.
There are no pre-requisites for this module but the following modules are recommended: EC534(Money and Banking), EC550(Monetary), EC548(international Finance), EC562(Finance 1).
This module appears in:
1 PC session
This module is compulsory for the BSc Financial Economics with Econometrics degree programme.
This module is an elective for all other Single and Joint Honours degree programmes in Economics.
This module is not available to students across other degree programmes in the University.
Method of assessment
In Course Test 1, (45 minutes) (10%)
In Course Test 2, (45 minutes) (10%)
Examination, 2 hours (80%)
By the end of the module, you will be able to:
* understand the basic concepts and issues in financial economics.
* demonstrate critical understanding of decision making relevant to investment optimisation.
* demonstrate knowledge and understanding of the principles of risk neutral asset pricing.
* understand the principles underlying numerical computation of asset prices.
* demonstrate analytical and numerical skills through analyses of asset pricing relevant to the working of financial markets.
* solve analytical, numerical and computational asset pricing problems.