Master's Programme in Business Administration (5 years)
Language of instruction
Knowledge of math calculus and basics of probability theory, statistics, and R programming. Builds upon previous courses in "Quantitative Methods", "Financial Econometrics", and "Investments", or equivalent.
Upon successful completion of this course the students should be able to
Explain option contracts and trading strategies with option
Plot and analyze the payoff and profit from derivative trading strategies
Retrieve financial prices and estimate the mean return and volatility
Describe the stochastic processes and simulate prices of financial assets
Master the theoretical foundations of contemporary derivative pricing theory
Fully understand the continuous-time Black-Scholes model for option pricing
Compute option prices using closed-form solutions
Compute implied volatility from market prices of options
Compute option prices using binomial trees
Compute option prices using Monte-Carlo simulation methods
The aim of this course is to provide a detailed treatment of the main theoretical foundations of contemporary derivative pricing theory and give students necessary quantitative skills in computation of prices of various derivative securities.
On the theoretical side, the course presents in-depth coverage of the absence of arbitrage pricing principle, stochastic processes for financial prices, the continuous-time Black-Scholes model, binomial option pricing, and pricing of options using Monte-Carlo simulation methods.
On the practical side, using the open source R statistical programming language, the students learn how to implement the computation of option prices using closed-form solutions, binomial trees, and simulation methods. In addition, the students learn how to simulate prices of financial assets. Last but not least, using real-life data the students learn how to estimate historical volatility and how to compute the implied volatility.
The course consists of lectures and group-work sessions. Estimated workload is about 200 hours.
Approved mandatory assignments. Further information is given in Canvas.
Assessment methods and criteria
2 days home examination which constitutes 100% of the final grade. Letter grades.