ETC3510

Modelling in finance and insurance ( 6 points, SCA Band 2, 0.125 EFTSL)

Leader: Professor Fima Klebaner and Professor Don Poskitt

Offered:
Clayton First semester 2005 (Day)

Synopsis: Mathematical definition of options and other financial derivatives; probability models; mathematical models of random processes; applications; numerical methods; Monte Carlo methods.

Objectives: To introduce students to methods of modern probability and random processes and their use in modeling in finance and insurance. On the completion of this unit, students will: understand the modern approach to evaluation of uncertain future payoffs, understand the concepts of arbitrage and fair games and their relevance to finance and insurance; understand concept of conditional expectation and martingales and their relation to pricing of financial derivatives; underestand models of random processes and be able to apply them in modelling real life processes and risk models; be able to understand the mathematics in underlying the pricing of options by application of models such as the Binomial and Black-Scholes models; be able to write the equation for the price of the option, and be able to simulate the price process and obtain prices by simulation.

Assessment: Assignments 30%; practical work 10%; Exam 60%.

Contact Hours: 3 one-hour lectures and 1 one-hour tutorial/practice class per week.

Prerequisites: ETC1010 or ETC2010 and one of ETC2400, ETC2410, ETC2430, ETC2480, ETC3440 ETC3444 or ETC4344