Stochastic and Actuarial Methods in Finance

This information is for the 2020/21 session.

Teacher responsible

Dr Erik Baurdoux COL 6.04


This course is available on the BSc in Actuarial Science, BSc in Business Mathematics and Statistics and BSc in Mathematics, Statistics and Business. This course is not available as an outside option. This course is available to General Course students.


Students must have completed:

EITHER Probability, Distribution Theory and Inference (ST202) OR Probability and Distribution Theory (ST206)

AND Stochastic Processes (ST302).

Course content

Theories of financial market behaviour. Applications of stochastic processes and actuarial models in finance. Utility theory. Stochastic dominance and portfolio selection. Measures of investment risk. Mean-variance portfolio theory. Single and multifactor models. The Capital Asset Pricing Model. The efficient market hypothesis.

Introduction to financial markets. Model-free relationships.

Stochastic models for security prices and interest rates and estimating their parameters. Option pricing: general framework in discrete and continuous time, the Black-Scholes analysis and numerical procedures (binomial models and Cox-Ross-Rubinstein models). The term structure of interest rates: the Vasicek, the Cox-Ingersoll-Ross and other models.  Introduction to credit risk.


This course will be delivered through a combination of seminars and lectures totalling a minimum of 60 hours across Michaelmas Term and Lent Term. This year, some or all of this teaching may be delivered through a combination of virtual classes and flipped-lectures delivered as short online videos. This course includes a reading week in Week 6 of Michaelmas/Lent Term.

Students will work on and submit formative coursework towards the end of MT and a second set of formative coursework towards the end of LT. Feedback and solutions will be provided

Formative coursework

Two sets of hand-in exercises will also be given during the year. 

Indicative reading

N H Bingham & R Kiesel, Risk Neutral Valuation; A Cerny, Mathematical Techniques in Finance: Tools for Incomplete Markets; J Hull, Options, Futures & Other Derivatives; R Jarrow & S Turnbull, Derivative Securities; D Luenberger, Investment Science; Institute of Actuaries core reading notes, Subject CT8.


Exam (100%, duration: 3 hours) in the summer exam period.

Student performance results

(2017/18 - 2019/20 combined)

Classification % of students
First 58.4
2:1 20.2
2:2 11.5
Third 4.1
Fail 5.8

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: Statistics

Total students 2019/20: 71

Average class size 2019/20: 71

Capped 2019/20: No

Value: One Unit

Guidelines for interpreting course guide information

Personal development skills

  • Problem solving
  • Application of numeracy skills
  • Specialist skills