MAS3904 : Stochastic Financial Modelling

Semester 1 Credit Value: 10
ECTS Credits: 5.0


To develop a knowledge and understanding of some commonly used financial models in the analysis of financial data.

Module summary
The demand for mathematical skills in financial institutions has increased considerably over the recent past. Financial analysts use sophisticated stochastic models to describe the unpredictable behaviour of markets, derive computable pricing methods and analyse financial data. The course deals with commonly used models for stock prices of risky assets and methods for pricing financial derivatives, such as options and contingent claims. The analysis of such models requires knowledge from probability, stochastic processes and statistics.

Outline Of Syllabus

Risk-free money market. Financial derivatives: call and put options of European type, contingent claims, other exotic options, arbitrage. Continuous-time models of stock price: Brownian/Geometric Brownian motion, Black-Scholes pricing. Volatility estimation using historic data, implied volatility. Monte Carlo pricing. Itô calculus: Itô integral and Itô formula. Models of interest rate as stochastic differential equations. Use of R for calculation and simulation.

Teaching Methods

Teaching Activities
Category Activity Number Length Student Hours Comment
Scheduled Learning And Teaching ActivitiesLecture31:003:00Problem classes
Scheduled Learning And Teaching ActivitiesLecture21:002:00Revision lectures
Scheduled Learning And Teaching ActivitiesLecture251:0025:00Formal lectures
Scheduled Learning And Teaching ActivitiesLecture11:001:00Class test
Guided Independent StudyAssessment preparation and completion113:0013:00Revision for unseen exam
Guided Independent StudyAssessment preparation and completion12:002:00Unseen exam
Guided Independent StudyIndependent study121:0021:00Studying, practising and gaining understanding of course material
Guided Independent StudyIndependent study33:009:00Review of written assignments and class test
Guided Independent StudyIndependent study112:0012:00Preparation for class test
Guided Independent StudyIndependent study26:0012:00Preparation for written assignments
Teaching Rationale And Relationship

Lectures are used for the delivery of theory and explanation of methods, illustrated with examples, and for giving general feedback on marked work. Problem Classes are used to help develop the students’ abilities at applying the theory to solving problems. Tutorials are used to identify and resolve specific queries raised by students and to allow students to receive individual feedback on marked work. In addition, office hours (two per week) will provide an opportunity for more direct contact between individual students and the lecturer.

Assessment Methods

The format of resits will be determined by the Board of Examiners

Description Length Semester When Set Percentage Comment
Written Examination1201A90N/A
Written Examination401M5Class test
Other Assessment
Description Semester When Set Percentage Comment
Written exercise1M5Two written assignments
Assessment Rationale And Relationship

A substantial formal unseen examination is appropriate for the assessment of the material in this module. The written exercises are expected to consist of two exercises of equal weight: the exact nature of assessment will be explained at the start of the module. The exercises and the in-course test allow the students to develop their problem solving techniques, to practise the methods learnt in the module, to assess their progress and to receive feedback; these are thus formative as well as summative assessments.

Reading Lists