620-302 Chance and Options Pricing

Credit Points

HECS Band

Coordinator

Prerequisites

620-201 and at least one of 620-112, 620-113, 620-122, 620-123, [98]620-130, [98]620-132, [99]620-142, 620-143, [99]620-200, 620-211. The unit 620-301 is strongly recommended.

Semester

Contact

Subject Description

This subject focuses on probability methods and their application to financial markets. Some applications to biological sciences and engineering are also given. Students learn probability modelling of uncertain real life situations by using the concepts of information flow, random variables, distributions and stochastic processes. They learn how to apply these concepts to build a market model in discrete and continuous time, and how to use these models for pricing and hedging of financial derivatives. Students are introduced to diffusion models in finance, biology and engineering. This subject demonstrates the importance of probability methods in finance and the sciences.

Topics covered: basic methods in probability and distribution theory in discrete and continuous time, transforms, conditioning, random walk, martingales, Brownian motion, Ito's formula, Brownian motion calculus, stochastic differential equations and diffusions. Applications include the Binomial and the Black-Scholes models in finance, branching diffusion in biology and filtering in engineering.

Assessment

Up to 3-hours end-of-semester written examination; up to 50 pages of assignments may be assessed.