MA570
Financial Mathematics in Discrete Time
0.5 Credit

This course introduces discrete-time financial models and their application to risk-neutral asset pricing and hedging. Students learn the concepts of arbitrage, martingale measure, and complete and incomplete markets. Using these concepts and models, students learn how to replicate payoffs of contingent claims using a portfolio or other securities and to construct martingale measures, hence providing both a value and hedging strategy for the claim. This analysis is carried out in both complete and incomplete market models. Students are introduced to American-style options and are able to value them using stopping times. Students are also introduced to Black-Scholes theory for pricing options and computing sensitivities of options prices to input parameters. Optional topics include an introduction to single-factor interest rate modelling and pricing of fixed income securities.