Financial Modelling Techniques III

Go to this course in the University Course Planner.

Description

This is a subject available to students enrolled in the Bachelor of Finance degree. The aims and contents are the same as for the subject Financial Modelling III.

Objective

Discrete time financial modelling of various financial assets, interest rates, exchange rates, using binomial models, and to present the modern theory of contingent claim pricing in these markets. At the end of this subject, students should understand basic financial market concepts, futures, forwards, options how to construct binomial tree models and their calibration how to price a wide variety of contingent claims, using principles of non-arbitrage.

Content

Introduction to financial concepts and contingent claims, market participants, and the use of various financial products. One step binomial asset pricing models; non-arbitrage, the model of Cox-Ross-Rubinstein, pricing European options, Call-Put parity, forward contracts, contingent premium options, risk-neutral probabilities, capital asset pricing model, exchange rates and interest-rate parity formula, interest rate derivatives. Multi-step binomial asset pricing models: the CRR model, complimentary binomial distribution function, central limit theorem and the Black-Scholes formula, calibration of CRR, volatility estimation, American style option pricing, barrier options, exotics, forwards and futures prices. Implied Binomial Trees, Implied Volatility Trees, Applications to Real options.

Janice Gaffney Lecturer for this course

Delivery

5 one-hour lectures and 1 one-hour tutorial every two weeks.

Assessment

85% examination (three hour), 15% assignment (including any computing assignments). It is compulsory to do tutorials and class

Graduate attributes

• Applying mathematical knowledge (1)
• Interpreting data and drawing conclusions (2)
• Formulating mathematical problems (3)
• Problem solving skills (4)
• Flexibility in working environment (5)
• Communication skills (6)
• Team participation and leadership (7)
• Self-directed study (8)

Linkage past

Prerequisite is MATHS 1007A/B Mathematics I (Pass Div 1) or MATHS 100A/B Mathematics 1M (Pass Div 1). Assumed knowledge will be a familiarity with Excel spreadsheets.

Linkage present

No present linkages have been noted.

Linkage future

This course is not recorded as prequisite for other courses.

Restrictions

Cannot be counted with APP MTH 3012 Financial Modelling III

Recommended text

A useful text is N. Chriss Black-Scholes and beyond.