Module description
Syllabus
Asset price in discrete time, random walks, conditional expectation, elements of discrete-time martingale theory, the binomial asset pricing model, option pricing in discrete time, and -time permitting- discrete time term structure models and/or discrete time portfolio theory.
Prerequisites
Probability and Statistics I (or equivalent) 4CCM141A
Assessment details
Written examination.
Semester 1 only students will be set an alternative assessment in lieu of in-person exams in January.
Full year students will complete the standard assessment.
Educational aims & objectives
This module aims to model the evolution of asset prices using the methodology of no-arbitrage in complete markets. The binomial asset pricing model will be the (mathematically easy!) vehicle used to introduce (profound!) financial concepts and necessary probability notions. This facilitates an intuitive understanding of terminology, preparing the student for the continuous-time equivalent, as well as providing a powerful practical tool.
Teaching pattern
Three hours of lectures and one hour of tutorial per week throughout the term
Suggested reading list
Indicative reading list - link to Leganto system where you can search with module code for lists