The primary goal of this module is to equip you with practical skills in finance. It comprises three subparts: Investors’ Optimization, Risk-Neutral Asset Pricing and Option Greeks and Option Strategies.
Investors’ Optimization serves as a foundational element in macro-finance models, which analyse asset pricing in light of dynamic optimization. We explore investors’ optimization problems, in order to introduce the concept of risk-neutral probability.
Risk-Neutral Asset Pricing is a powerful tool for the valuation of financial derivatives. Widely used in the financial industry, this method covers a broad spectrum of financial derivatives. We construct tree models based on risk-neutral probability.
Option Greeks and Option Strategies examines key trading strategies and hedging techniques involving financial options.We discuss the practical application of the Black-Scholes-Merton (BSM) option pricing formula and its applications.
In this module, you will learn to apply these concepts to actual data as you would in real-life scenarios. Successful completion of this module requires both theoretical knowledge and practical implementation.
Lecture 16, Seminar 16, PC lab 10
Test. Assessment Details: Online test worth 20%.
Portfolio. Assessment Details: Writing a set of computer programs worth 30%.
Examination. Assessment Details: 2 hours closed book exam worth 50%.
Reassessment Method: Like for like
On successfully completing the module, you will be able to:
1) Think strategically based on the basic concepts of Financial Economics.
2) Understand the theoretical foundation of the asset pricing. That is, understand the equivalence among the investors’ optimization, the no-arbitrage condition and risk-neutral probability.
3) Construct small-sized tree models for exotic financial derivatives, based on some algorithm ideas
4) Utilize the BSM formula to design derivative trading strategies, by employing the BSM formula and other techniques for portfolio risk hedging. 5) Gain proficiency in using written computer programmes, and develop the ability to write simple computer programmes independently.
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