Important: This module is only available to final year (4) integrated Masters students in the Department of Statistics.
Commitment: 3 x 1-hour lectures per week, 1 tutorial class per fortnight. This module runs in Term 1.
Prerequisite(s): ST318 Probability Theory and ST339 Introduction to Mathematical Finance.
Leads to: ST909 Continuous Time Finance for Interest Rate Models.
Aims: To provide an introduction to continuous time stochastic models as applied in mathematical finance. To cover, in conjunction with ST339 Introduction to Mathematical Finance, the CT8 Actuarial syllabus. To gain an understanding of Brownian Motion and Stochastic Calculus. To be able to use this to model the evolution of financial markets in continuous time and price a variety of financial instruments.
- Introduction to Brownian Motion and Stochastic Calculus.
- Introduction to SDEs (Stochastic Differential Equations) and Markov processes.
- Continuous-time models of security prices.
- Risk-neutral evaluation and equivalent martingale measures, Girsanov and martingale representation theorems.
- Black-Scholes theory: PDE and SDE approaches.
- Basic Greeks, delta-hedging.
- Put-Call parity and Put-Call symmetry.
- Introduction to optimal stopping and American Options.
- Bond prices and term structure of interest rates: Hull-White, Vasicek and CIR models.
Books: See http://readinglists.warwick.ac.uk/modules/st401.html
Assessment: 100% by 2 hour April examination