ICM292-Derivatives Modelling

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Co-requisites: ICM127 Stochastic Calculus and Probability
Modules excluded:
Current from: 2021/2

Module Convenor: Dr Emese Lazar
Email: e.lazar@icmacentre.ac.uk

Type of module:

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 this module 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:

Teaching is based on tailor made lecture notes.

Compulsory homework assignments are set weekly.

Lectures are supported by discussions of the homework assignments in interactive seminars.

In addition frequent reference is made to the recommended textbooks.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 10
Guided independent study:      
    Wider reading (independent) 60
    Exam revision/preparation 40
    Advance preparation for classes 10
    Preparation for presentations 10
    Revision and preparation 20
    Essay preparation 25
    Reflection 5
Total hours by term 0 200 0
Total hours for module 200

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

Summative assessment- Examinations:

One written final exam (closed book) of length 2 hours.

Summative assessment- Coursework and in-class tests:

5 written assignments (take home, open book) with submission dates in weeks 4-6, 6-7, 7-8, 8-9 and 9-10 of the term, respectively, each worth 4% of the final mark.

Formative assessment methods:

Penalties for late submission:

The below information applies to students on taught programmes except those on Postgraduate Flexible programmes. Penalties for late submission, and the associated procedures, which apply to Postgraduate Flexible programmes are specified in the policy “Penalties for late submission for Postgraduate Flexible programmes”, which can be found here: http://www.reading.ac.uk/web/files/qualitysupport/penaltiesforlatesubmissionPGflexible.pdf
The Support Centres will apply the following penalties for work submitted late:

  • where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days;
  • where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.
The University policy statement on penalties for late submission can be found at: http://www.reading.ac.uk/web/FILES/qualitysupport/penaltiesforlatesubmission.pdf
You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Assessment requirements for a pass:
50% weighted average mark

Reassessment arrangements:

By written examination only, to be taken in August/September, 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: 8 April 2021


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