This information is for the 2021/22 session.
Dr Thummim Cho and Dr Rohit Rahi
This course is compulsory on the BSc in Financial Mathematics and Statistics. This course is available on the BSc in Accounting and Finance, BSc in Business Mathematics and Statistics, BSc in Econometrics and Mathematical Economics, BSc in Economics, BSc in Mathematics and Economics, BSc in Mathematics, Statistics and Business and Diploma in Accounting and Finance. 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.
Students must have completed Principles of Finance (FM212 or FM213), Mathematical Methods (MA100) and Elementary Statistical Theory (ST102). Introduction to Econometrics, Principles of Econometrics or other statistics courses where at least linear regression models are covered are recommended but not required. Students who have not taken Principles of Finance, but have an excellent quantitative background, may be allowed to take this course at the discretion of the course leader.
This course is intended for third-year undergraduates and builds upon FM212/FM213 Principles of Finance. The main topics covered are financial risk analysis and financial risk management (first part of the course) and derivatives pricing (second part). As such, this course is complementary to FM300 Corporate Finance, Investments and Financial Markets, with minimal overlap.
The first part of the course provides students with a thorough understanding of market risk from both a practical and technical point of view. A representative list of topics covered includes:
- empirical properties of market prices (fat tails, volatility clusters) and forecasting of conditional volatility
- concepts of financial risk (volatility, Value-at-Risk)
- univariate and multivariate volatility models (ARCH, GARCH)
- implementation and evaluation of risk forecasts
- endogenous risk
- credit markets and liquidity
Students apply the models to real financial data using Matlab, a programming environment widely used in industry and academia. No prior knowledge of programming is assumed: students will learn-by-doing in class. Students will at times use data and software for classwork assignments.
The second part of the course focuses on derivatives, with a particular emphasis on equity derivatives (standard call and put options, exotic options), futures and forward contracts, and interest rate derivatives (swaps, caps and floors, swaptions). It systematically addresses three basic questions: how do these products work, i.e. what are their payoffs? How can they be used, for hedging purposes or as part of trading strategies? And above all: how are they priced? The course emphasises a small number of powerful ideas: absence of arbitrage, replication, and risk-neutral pricing. These are typically introduced in the context of discrete-time models, but the course also covers some well-known continuous-time models, starting with a comprehensive treatment of the Black-Scholes model. The level of mathematics is appropriate for third-year students with a solid quantitative background.
20 hours of lectures and 10 hours of classes in the MT. 20 hours of lectures and 10 hours of classes in the LT.
Students will be expected to produce written work for classes and to make positive contributions to class discussion.
J Danielsson, Financial Risk Forecasting: The Theory and Practice of Forecasting Market Risk will be the required textbook for the first half of the course; additional readings may be assigned as needed.
For the second half of the course, there is no required textbook, but the following is an excellent reference: J Hull, Options, Futures, and Other Derivatives.
Exam (45%, duration: 2 hours) in the summer exam period.
Coursework (50%) in the MT.
Coursework (5%) in the LT.
Course selection videos
Some departments have produced short videos to introduce their courses. Please refer to the course selection videos index page for further information.
Important information in response to COVID-19
Please note that during 2021/22 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 differing needs of students in attendance on campus and those who might be studying online. For example, this may involve changes to the mode of teaching 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.
Total students 2020/21: 100
Average class size 2020/21: 33
Capped 2020/21: No
Value: One Unit
Personal development skills
- Problem solving
- Application of numeracy skills
- Commercial awareness
- Specialist skills