This module is not currently running in 2024 to 2025.
The aim of this module is to study the theoretical foundations of the contemporary financial economics practice. The module consists of two main parts. In the first part, starting with the brief introduction to the probability theory and the stochastic calculus, we study the martingale asset pricing, which is a revolutionary idea in the derivative pricing. Because financial derivatives are often convoluted, it is difficult to evaluate their risk-premium explicitly. What is surprising in the martingale asset pricing is that it tells how to construct a hypothetical (but theoretically consistent) probability density, under which there is no risk-premium explicitly on any derivative prices. It rather takes into account the risk-premium implicitly by modifying the probability density. The other key issues we study include the Feynman-Kac stochastic representation and some practically important stochastic processes. In the second part, we study real options, which quite often arise in actual business scenes and real life. The examples of real options range from large scale capital investments to suicide. It turns out that when a decision is irreversible and the future is uncertain, the value of information is a homomorphism to financial options. As an informal prerequisite, the students are expected to be familiar with the reality of the actual financial markets, while they are not required more than high-school level math. The module emphasises the intuitions rather than rigorous math and offers some heuristics when they are useful.
Private Study: 120
Contact Hours:30
Total:150
Compulsory for:
MSc Financial Economics
Optional for:
MSc Economics
Online Test x 2 (10% each)
Examination (2 hours): 80%
Reassessment Method:
100% Exam
*Exams will be online*
The University is committed to ensuring that core reading materials are in accessible electronic format in line with the Kent Inclusive Practices.
The most up to date reading list for each module can be found on the university's reading list pages.
See the library reading list for this module (Canterbury)
Apply stochastic calculus and basic probability theory to analyse the risk-return profile of financial products
Comprehensively understand martingale asset pricing method and its key elements
Understand stochastic optimization and its application to the pricing of financial derivatives
Understand the leading bond pricing methodologies.
Understand real world problems in light of statistics/probability theory and basic mathematics
Profoundly understand the trade-offs between risk and return
Write simple computer programmes to solves real world problems quantitatively.
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