Stochastic Processes: the Fundamentals

2019-2020

Course Objective

The purpose is to introduce fundamental concepts underlying arbitrage
theory and martingale approach with the emphasis on practical
applications in derivative pricing.

Course Content

This course is an introduction to stochastic processes and their
application in Finance. The purpose is to introduce fundamental concepts
underlying arbitrage theory and martingale approach with the emphasis on
practical applications in derivative pricing. It consists of two major
parts: Fundamentals (period 1) and Derivatives (period 2).

The first part introduces such notions as stochastic processes, flow of
information, filtration, martingale, self-financing portfolio,
arbitrage, replication/hedging, complete markets, Brownian motion, Itô's
calculus, Feynman-Kac theorem, change of measure, and Girsanov's
theorem.
It considers the binomial tree model and Geometric Brownian Motion to
price simple derivatives.

Teaching Methods

Two lectures per week and tutorials: problem solving and computer-based

Method of Assessment

Assessment of two computer assignments (each 12.5%) and written exam
(75%)

Entry Requirements

Calculus
Probability Theory

Literature

Bjork "Arbitrage Theory in Continuous Time"

Target Audience

MSc Honours program in Quant Risk Management
MSc Financial Econometrics

Recommended background knowledge

Matlab (or comparable) experience desirable

General Information

Course Code E_FIN_SPFUN
Credits 6 EC
Period P1
Course Level 400
Language of Tuition English
Faculty School of Business and Economics
Course Coordinator dr. M. Boes
Examiner dr. M. Boes
Teaching Staff dr. M. Boes

Practical Information

You need to register for this course yourself

Last-minute registration is available for this course.

Teaching Methods Study Group, Lecture
Target audiences

This course is also available as: