- Department: Mathematics
- Credit value: 20 credits
- Credit level: M
- Academic year of delivery: 2023-24
- See module specification for other years: 2024-25
In this module you will learn the basic mathematics that is applied in the area of finance. In particular, you will learn how to build a theory of portfolio selection and, consequently, asset prices in both complete and incomplete markets. This theory will then be applied to the valuation of financial and real assets. All models will be in discrete time.
Counts towards IFoA exemption.
Pre-requisite modules
Co-requisite modules
- None
Prohibited combinations
Post requisite module: Mathematical Finance in Continuous Time
Occurrence | Teaching period |
---|---|
A | Semester 1 2023-24 |
In this module you will learn the basic mathematics that is applied in the area of finance. In particular, you will learn how to build a theory of portfolio selection and, consequently, asset prices in both complete and incomplete markets. This theory will then be applied to the valuation of financial and real assets. All models will be in discrete time.
By the end of the module, students will be able to:
Describe, analyse, and apply the Markowitz portfolio theory
Describe, analyse, and apply the Capital Asset Pricing Model
Describe, analyse, and apply the theory of expected utility
Describe, analyse, and apply the theory of arbitrage pricing in complete markets in discrete time
(M-level only) Describe and analyse incomplete markets on example of the trinomial model.
The module starts by building a two-period model of financial markets that is used to explore the classical theory of portfolio selection due to Markowitz. This theory is then extended to a theory of asset prices (CAPM) in financial markets. In the context of the multi-period binomial model, you will learn about the no-arbitrage principle and how it can be used to price a variety of assets in a complete market, such as European, American and real options. We finish by discussing some well-known and oft-used risk measures.
The additional M-level material will be self-study, based on lecture notes and pre-recorded videos.
Task | % of module mark |
---|---|
Closed/in-person Exam (Centrally scheduled) | 80 |
Essay/coursework | 20 |
None
If a student has a failing module mark, only failed components need be reassessed.
Task | % of module mark |
---|---|
Closed/in-person Exam (Centrally scheduled) | 80 |
Essay/coursework | 20 |
Current Department policy on feedback is available in the student handbook. Coursework and examinations will be marked and returned in accordance with this policy.
Capinski, M. and T. Zastawniak (2003), Mathematics for Finance, Springer Verlag.
Evstigneev, I., T. Hens, and K. Schenk-Hoppé (2015), Mathematical Financial Economics, Springer Verlag.
Magill, M. and M. Quinzii (1996), Theory of Incomplete Markets, MIT Press.
Shreve, S. (2004), Stochastic Calculus for Finance I: The binomial asset pricing model, Springer.