# Mathematics of Financial Derivatives - MA837

Location Term Level Credits (ECTS) Current Convenor 2019-20
Canterbury
(version 2)
Spring
View Timetable
7 15 (7.5) DR P Tapadar

### Pre-requisites

MA629 (Probability and Inference)

None

2019-20

## Overview

This module introduces the main features of basic financial derivative contracts and develops pricing techniques. Principle of no-arbitrage, or absence of risk-free arbitrage opportunities, is applied to determine prices of derivative contracts, within the framework of binomial tree and geometric Brownian motion models. The interplay between pricing and hedging strategies, along with risk management principles, are emphasized to explain the mechanisms behind derivative instruments. Models of interest rate and credit risk are also discussed in this context. Outline syllabus includes: An introduction to derivatives, binomial tree model, Black-Scholes option pricing formula, Greeks and derivative risk management, interest rate models, credit risk models.

Marks on this module can count towards exemption from the professional examination CT8 of the Institute and Faculty of Actuaries. Please see http://www.kent.ac.uk/casri/Accreditation/index.html for further details.

36 hours

## Method of assessment

75% Exam, 25% Coursework

Hull, John, Options, futures and other derivatives, 7th Edition, Prentice Hall.
Baxter, Martin; Rennie, Andrew, Financial Calculus: an introduction to derivative pricing, Cambridge University Press, 1996

See the library reading list for this module (Canterbury)

## Learning outcomes

The intended subject specific learning outcomes. On successfully completing the module students will be able to:

1 demonstrate a knowledge and understanding of the properties of option prices, valuation methods and hedging techniques including the Black-Scholes derivative-pricing model; critically evaluate the use of the Black-Scholes model and the assumptions underlying its use;
2 demonstrate a knowledge and understanding of models of the term structure of interest rates as currently used within the investment industry and solve problems using these models;
3 demonstrate a knowledge and understanding of models for credit risk and solve problems using these models;
4 appreciate recent developments and methodologies in Financial Economics and the links between the theory of Financial Economics and their practical application and to critically evaluate such methodologies

The intended generic learning outcomes. On successfully completing the module students will be able to:

1 demonstrate a logical mathematical approach to solving complex problems including cases where information/data is not complete
2 demonstrate skills in written communication to both technical and non-technical audiences,
3 demonstrate skills in the use of relevant information technology,
4 demonstrate skills in time management, organisation and studying so that tasks can be planned and implemented at a professional level.

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