Postgraduate Course: Derivative Pricing and Financial Modelling (MATH11057)
Course Outline
School  School of Mathematics 
College  College of Science and Engineering 
Credit level (Normal year taken)  SCQF Level 11 (Postgraduate) 
Availability  Not available to visiting students 
SCQF Credits  15 
ECTS Credits  7.5 
Summary  The aim of this course is to study the application of the BlackScholes model to the range of derivative securities encountered in the market, and to the term structure of interest rates. The principle tool will be the equivalent martingale measure. Links between derivative prices and PDEs will be indicated but solution of PDEs will be covered elsewhere. Discrepancies between the BlackScholes model and market data will be described, and alternative models presented.
This course is only available to students on the MSc Financial Mathematics programme. 
Course description 
The BlackScholes PDE.
Extension of the BlackScholes model to stocks paying dividends, foreign exchange and derivatives on futures; futures prices under the riskneutral measure; market price of risk.
Hedging and the Greeks; portfolio insurance.
The termstructure of interest rates: spot rates, forward rates and the yield curve.
Discretetime interestrate models.
Continuoustime interestrate models: Vasicek, CoxIngersollRoss, pricing interest rate derivatives; the HeathJarrowMorton approach; other noarbitrage models.

Entry Requirements (not applicable to Visiting Students)
Prerequisites 

Corequisites  
Prohibited Combinations  
Other requirements  MSc Financial Mathematics students only. 
Course Delivery Information

Academic year 2015/16, Not available to visiting students (SS1)

Quota: None 
Course Start 
Semester 2 
Timetable 
Timetable 
Learning and Teaching activities (Further Info) 
Total Hours:
150
(
Lecture Hours 40,
Summative Assessment Hours 2,
Programme Level Learning and Teaching Hours 3,
Directed Learning and Independent Learning Hours
105 )

Additional Information (Learning and Teaching) 
Examination takes place at HeriotWatt University.

Assessment (Further Info) 
Written Exam
100 %,
Coursework
0 %,
Practical Exam
0 %

Additional Information (Assessment) 
See 'Breakdown of Assessment Methods' and 'Additional Notes' above. 
Feedback 
Not entered 
Exam Information 
Exam Diet 
Paper Name 
Hours & Minutes 

Main Exam Diet S2 (April/May)  Derivatives Markets and Derivative Pricing & Financial Modelling  3:00  
Learning Outcomes
On completion of this course the student should be able to:
 demonstrate an understanding of the theoretical frameworks for pricing derivatives, including the BlackScholes model;
 demonstrate an awareness of the differences between the realworld and the riskneutral probability measures;
 derive the underlying theory for pricing bonds and interestrate derivatives;
 show their critical understanding of the assumptions underlying common models of asset process and interest rates;
 show a conceptual understanding of the processes in pricing derivative securities to enable the wider application of knowledge in different and new contexts;
 calculate approximate prices for European and Americanstyle derivatives using the binomial model;
 use the BlackScholes formula to tackle appropriate problems;
 demonstrate how to price and hedge simple equity derivatives contracts;
 demonstrate how the Greeks can be used to manage the risk in a portfolio of derivatives;
 apply the main models for the termstructure of interest rates for pricing bonds and interestrate;
 find problem solutions in groups;
 plan and organize selfstudy and independent learning;
 use programming tools in the application of pricing methods;
 communicate effectively problem solutions to peers.

Reading List
Etheridge, A. (2002). A Course in Financial Calculus. CUP.
Cairns, A.J.G. (2003). Interest Rate Models: An Introduction. Princeton University Press.
Hull, J.C. (2002). Options, Futures and Other Derivatives (5th Edition). PrenticeHall.
Lamberton, D. & Lapeyre, B. (1996). Introduction to Stochastic Calculus Applied to Finance. Chapman & Hall.
Bingham, N.H. & Kiesel, R. (2004). RiskNeutral Valuation. Pricing and Hedging of Financial Derivatives. Springer.

Additional Information
Graduate Attributes and Skills 
Not entered 
Keywords  DPFM 
Contacts
Course organiser  Dr Sotirios Sabanis
Tel: (0131 6)50 5084
Email: S.Sabanis@ed.ac.uk 
Course secretary  Mr Thomas Robinson
Tel: (0131 6)50 4885
Email: Thomas.Robinson@ed.ac.uk 

