Description:

Discussion of essential mathematical valuation principles and techniques both in time-discrete and time-continuous models. Introduction and implementation of probabilistic and statistical methods. Analysis of stock, interest and commodity markets and also of the most common assets and derivatives in these markets.

Learning Targets:

Students

• know the most important mathematical modelling techniques of financial markets and can apply them to real wordproblems.
• are able to value simple derivative assets and can apply the main principles of risk management.
• are able to solve basic risk management tasks arising in financial institutions and the energy industry.

Outline:

1. Mathematical models for price processes in stock, interest, and commodity markets
2. Arbitrage theory and hedging strategies
3. Stochastic models for financial markets: martingales and fundamental theorems in asset pricing
4. Valuation and hedging of derivatives: European , American and exotic options
5. Incomplete markets and stochastic volatility

Literature:

• N.H. Bingham & R. Kiesel, Risk Neutral Valuation, 2nd edition, Springer, 2004.
• M. Joshi, The Concepts and Practice of Mathematical Finance, CUP, 2003
• S. Shreve, Stochastic Calculus for Finance II: Continuous-Time Models, Springer, 2004

Methods of Assessment:

Written exam (90 minutes)

Formalities:

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Material:

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