ICM292-Derivatives Modelling

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Pre-requisites: ICM127 Stochastic Calculus and Probability
Non-modular pre-requisites:
Modules excluded:
Module version for: 2017/8

Module Convenor: Dr Emese Lazar

Email: e.lazar@icmacentre.ac.uk

Summary module description:

This module introduces the main approaches used for derivatives pricing, based on the concepts covered in the Stochastic Calculus and Probability module. It discusses discrete time as well as continuous time valuations, including the Black-Scholes model and the martingale approach. These ideas are developed further in the Advanced Derivatives Modelling module, whilst DM provides a link with the Numerical Methods for Financial Engineering module as well.

To convey the basic concepts and analytical methodology for the valuation of derivatives in the standard Black-Scholes framework.

Assessable learning outcomes:
By the end of the module, it is expected that the student will be able to:
• derive the price, in discrete and continuous frameworks, using different methods, for a variety of equity based simple and exotic derivatives
• digest the literature on equity based derivatives at an intermediary level, compare different methodologies and evaluate results

Additional outcomes:
The module creates awareness of the mathematical foundation for working in the area of financial derivatives’ pricing. This will also create motivation and background for further study in other areas as well (eg. the pricing of interest rate and credit derivatives). The students will get an introduction into the models and pricing of interest rate and credit derivatives.

Outline content:
1. Introduction, use of derivatives, the greeks
2. Discrete time valuation
3. Continuous time valuation
4. Black-Scholes model, properties and extensions
5. Martingale approach
6. Complete and incomplete markets
7. Claims on currencies and multiple assets; foreign equity markets
8. Selected equity, interest rate and credit derivatives

Brief description of teaching and learning methods:
Lectures supported by discussion of homework assignment in interactive seminars.
Teaching is based on tailor made lecture notes.
In addition frequent reference is made to the recommended textbooks.
Compulsory homework assignments are set weekly.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 10
Guided independent study 70
Total hours by term 100.00
Total hours for module 100.00

Summative Assessment Methods:
Method Percentage
Written exam 60
Written assignment including essay 20
Class test administered by School 20

Other information on summative assessment:

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Length of examination:
2 hours closed book written examination

Requirements for a pass:
50% weighted average mark

Reassessment arrangements:
By written examination only, as part of the overall examination arrangements for the MSc programme

Additional Costs (specified where applicable):
1) Required text books: Thomas Bjork: Arbitrage Theory in Continuous Time OUP Oxford, 2009, ISBN-10: 019957474X, £50.00.
2) Specialist equipment or materials:
3) Specialist clothing, footwear or headgear:
4) Printing and binding:
5) Computers and devices with a particular specification:
6) Travel, accommodation and subsistence:

Last updated: 31 March 2017

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