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MA415 Half Unit

The Mathematics of the Black and Scholes Theory

**This information is for the 2020/21 session.**

**Teacher responsible**

Prof Mihail Zervos

**Availability**

This course is compulsory on the MSc in Financial Mathematics. This course is available on the MSc in Statistics (Financial Statistics), MSc in Statistics (Financial Statistics) (LSE and Fudan) and MSc in Statistics (Financial Statistics) (Research). This course is available with permission as an outside option to students on other programmes where regulations permit.

**Pre-requisites**

Students must have completed September Introductory Course (Financial Mathematics and Quantitative Methods for Risk Management) (MA400).

**Course content**

This course is concerned with a mathematical development of the risk-neutral valuation theory. In the context of the binomial tree model for a risky asset, the course introduces the concepts of replication and martingale probability measures. The mathematics of the Black & Scholes methodology follow; in particular, the expression of European contingent claims as expectations with respect to the risk-neutral probability measure of the corresponding discounted payoffs, pricing formulae for European put and call options, and the Black & Scholes PDE are derived. A class of exotic options is then considered. In particular, pricing formulas for lookback and barrier options are derived using PDE techniques as well as the reflection property of the standard Brownian motion. The course also introduces a model for foreign exchange markets and various foreign exchange options.

**Teaching**

This course is delivered through a combination of classes and lectures totalling a minimum of 30 hours across Michaelmas Term. This year, some or all of this teaching will be delivered through a combination of virtual classes and lectures delivered as online videos.

**Indicative reading**

N H Bingham and R Kiesel, Risk-Neutral Valuation, Springer; T Björk, Arbitrage Theory in Continuous Time, Oxford; P J Hunt and J Kennedy, Financial Derivatives in Theory and Practice, Wiley; D Lamberton and J Kennedy, Introduction to Stochastic Calculus Applied to Finance, Chapman & Hall; D. Lamberton and B. Lapeyre, Introduction to Stochastic Calculus Applied to Finance, Chapman & Hall/Crc Financial Mathematics Series, 2nd edition, 2007; S E Shreve, Stochastic Calculus for Finance: Continuous-time Models: vol. 2, Springer

**Assessment**

Exam (100%, duration: 2 hours) in the summer exam period.

**Important information in response to COVID-19**

Please note that during 2020/21 academic year some variation to teaching and learning activities may be required to respond to changes in public health advice and/or to account for the situation of students in attendance on campus and those studying online during the early part of the academic year. For assessment, this may involve changes to mode of delivery and/or the format or weighting of assessments. Changes will only be made if required and students will be notified about any changes to teaching or assessment plans at the earliest opportunity.

** Key facts **

Department: Mathematics

Total students 2019/20: 20

Average class size 2019/20: 21

Controlled access 2019/20: No

Value: Half Unit