MA415      Half Unit
The Mathematics of the Black and Scholes Theory

This information is for the 2018/19 session.

Teacher responsible

Dr Albina Danilova and Dr Johannes Ruf


This course is compulsory on the MSc in Financial Mathematics. This course is available on the MSc in Statistics (Financial Statistics) 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.


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.


20 hours of lectures and 20 hours of seminars in the MT.

The MA415 course has 30 compulsory hours of teaching with an additional 10 hours which are optional and reserved for covering advanced material and/or applications chosen by students.  Students are strongly encouraged to attend the additional hours offered.

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


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

Key facts

Department: Mathematics

Total students 2017/18: 28

Average class size 2017/18: 28

Controlled access 2017/18: No

Value: Half Unit

Guidelines for interpreting course guide information

Course survey results

(2014/15 - 2016/17 combined)

1 = "best" score, 5 = "worst" score

The scores below are average responses.

Response rate: 58%



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