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DRPS : Course Catalogue : School of Mathematics : Mathematics

Postgraduate Course: Risk-Neutral Asset Pricing (MATH11157)

Course Outline
SchoolSchool of Mathematics CollegeCollege of Science and Engineering
Credit level (Normal year taken)SCQF Level 11 (Postgraduate) AvailabilityNot available to visiting students
SCQF Credits10 ECTS Credits5
SummaryTo provide solid mathematical foundations for pricing derivative products in financial markets, highlighting the points where the idealized and the realistic diverge.
Course description - Risk-neutral valuation of contingent claims. Pricing PDEs.
- Some important option types in the Black-Scholes setting. Parameter sensitivity (Greeks).
- Incomplete markets, pricing and hedging.
- The term structure of interest rates: short rate models (Vasicek, CIR) and the HJM framework.
- Pricing of credit derivatives.
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Co-requisites
Prohibited Combinations Other requirements None
Course Delivery Information
Academic year 2021/22, Not available to visiting students (SS1) Quota:  None
Course Start Semester 2
Timetable Timetable
Learning and Teaching activities (Further Info) Total Hours: 100 ( Lecture Hours 18, Seminar/Tutorial Hours 4, Summative Assessment Hours 2, Programme Level Learning and Teaching Hours 2, Directed Learning and Independent Learning Hours 74 )
Assessment (Further Info) Written Exam 80 %, Coursework 20 %, Practical Exam 0 %
Additional Information (Assessment) Examination 80%; Coursework 20%
Feedback Not entered
Exam Information
Exam Diet Paper Name Hours & Minutes
Main Exam Diet S2 (April/May)Risk-Neutral Asset Pricing (MATH11157)2:00
Learning Outcomes
On completion of this course, the student will be able to:
  1. Demonstrate familiarity with the fundamental tools of no-arbitrage pricing (Girsanov change of measure, martingale representation).
  2. Demonstrate knowledge of most important option types (European, American, exotic), and familiarity with the PDE methodology for computing option prices.
  3. Understand the essentials of short rate and forward rate models (i.e. HJM).
  4. Demonstrate familiarity with the basic credit derivatives and with the problems in their pricing (default sensitivity).
  5. Understand the main uses of derivatives in hedging, arbitrage and speculations, by answering relevant exam questions.
Reading List
Bingham, N.H. & Kiesel, R. (2004). Risk-Neutral Valuation. Pricing and Hedging of Financial Derivatives. Springer.
Lamberton, D. & Lapeyre, B. (1996). Introduction to Stochastic Calculus Applied to Finance. Chapman & Hall.
Williams, D. (1991). Probability with Martingales. CUP.
Additional Information
Graduate Attributes and Skills Not entered
Special Arrangements MSc Financial Modelling and Optimization and MSc Computational Mathematical Finance students only.
Course organiserMr Stefan Engelhardt
Course secretaryMiss Gemma Aitchison
Tel: (0131 6)50 9268