ST213      Half Unit
Introduction to Pricing, Hedging and Optimization

This information is for the 2019/20 session.

Teacher responsible

Prof Konstantinos Kardaras COL 6.07


This course is compulsory on the BSc in Financial Mathematics and Statistics. This course is available as an outside option to students on other programmes where regulations permit. This course is available with permission to General Course students.


MA203 Real Analysis. Must be taken with ST202 Probability, Distribution Theory and Inference.

Course content

This course introduces the concepts of valuation, hedging and portfolio selection in a discrete-time environment. Towards the end, it introduces continuous-time markets in a heuristic fashion. It covers the following topics:


• The binomial model; pricing and replication.

• Trinomial model and incompleteness, arbitrage-free price intervals.

• General discrete-time models and the fundamental theorems.

• Portfolio optimization and hedging.

• Martingale theory in discrete time.

• Multi-period models and backwards induction methods.

• Passage to continuous time Black & Scholes model.


20 hours of lectures and 10 hours of seminars in the LT.

Formative coursework

Students will be expected to produce 9 problem sets in the LT.

Certain problem sets will be returned with feedback.

Indicative reading

Lecture notes will be provided.


Exam (80%, duration: 2 hours, reading time: 15 minutes) in the summer exam period.
Coursework (20%).

Key facts

Department: Statistics

Total students 2018/19: 35

Average class size 2018/19: 35

Capped 2018/19: No

Value: Half Unit

Guidelines for interpreting course guide information

Personal development skills

  • Self-management
  • Problem solving
  • Communication
  • Application of numeracy skills
  • Specialist skills