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Math 3801

This course is a level III compulsory course in actuarial science and finance called Financial Mathematics II with a course code of MATH3801. It is offered in the first semester and carries 3 credits. The prerequisites for the course are Financial Mathematics I, Financial Management I, Financial Management II, and Introduction to Probability Theory. The course builds on concepts from the prerequisites and teaches tools for asset/liability management, product design, pricing, valuation, and risk hedging. By the end of the course students will understand fixed income and derivative products, how they work, are priced, and how financial risks are hedged. The course will be delivered through lectures, tutorials, and other activities. Assessment includes a course

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94 views

Math 3801

This course is a level III compulsory course in actuarial science and finance called Financial Mathematics II with a course code of MATH3801. It is offered in the first semester and carries 3 credits. The prerequisites for the course are Financial Mathematics I, Financial Management I, Financial Management II, and Introduction to Probability Theory. The course builds on concepts from the prerequisites and teaches tools for asset/liability management, product design, pricing, valuation, and risk hedging. By the end of the course students will understand fixed income and derivative products, how they work, are priced, and how financial risks are hedged. The course will be delivered through lectures, tutorials, and other activities. Assessment includes a course

Uploaded by

Ayad Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COURSE NAME: Financial Mathematics II

COURSE CODE: MATH3801

LEVEL: III

SEMESTER: I

NUMBER OF CREDITS: 3

PREREQUISITES:

Financial Mathematics I (MATH2701), Financial Management I (MGMT2023), Financial


Management II (MGMT3048), Introduction to Probability Theory (MATH2404)

RATIONALE

This is a compulsory level III course which is an important course in actuarial science and finance.
Candidates should master the fundamental concepts as indicated in the “Learning outcomes”. This
course allows the candidate to begin preparation for the professional examinations Financial
Mathematics (FM) of the Society of Actuaries and Financial Economics (CT8) of the Institute of
Actuaries. This course will help develop the critical thinking and communication skills required to
construct asset liability models and to value financial derivatives.

COURSE DESCRIPTION

This course builds on the material in Financial Mathematics I and Financial Management I and II,
introducing further tools and techniques of asset/liability management, general product design, as
well as issues of pricing, valuation and asset management. By the end of the course, students
will have good knowledge of how fixed income and derivative products work, how they are
used, how they are priced, and how financial institutions hedge their risks when they trade
derivative products.

LEARNING OUTCOMES

On completion of this course the student should be able to:

 Define the terms current value, duration (MaCaulay, modified, effective), convexity, spot
rate, forward rate,

 Determine the duration and convexity of a set of cash flows


 Determine the approximate change in present value given a change in interest rate
 Define the terms cash flow matching, immunization
 Construct an investment portfolio to immunize a set of liability cash flows
 Construct an investment portfolio to match the present value and duration of a set of
liability cash flows
 Define the following: derivative, underlying asset, OTC market, ask price, bid price, bid-
ask spread, short selling, short position, long position, net profit, net payoff, stock index,
marking-to-market, margin, maintenance margin, margin call
 Evaluate the margin position of an investor based on asset values
 Define the following call option, put option, expiration, exercise/strike price, European
option, American option, Bermudan option, in-the-money, at-the-money, out-the-money,
covered call, naked writing, put-call-parity
 Evaluate the payoffs of derivative contracts
 Value an option using binomial option pricing model, Black-Scholes Option Pricing
model, risk neutral valuation

CONTENT

Bond price Sensitivity

Review bond valuation. Bond price sensitivity to changes in coupon rate, yield rate, and term to
maturity.

General Cash flow and Portfolios

Duration and convexity of a set of cash flows. Spot rates, forward rates, yield curve, bootstrapping.

Immunization

Cash flow matching, immunization, construction of investment portfolios.

Introduction to Derivatives

OTC market, ask/bid price, short selling, short/long position, credit risk, marking-to-market,
margin; derivative: call/put option, European/American/Bermudan Option, covered call, naked
writing, protective put, put-call-parity. Option Valuation (binomial model, Black-Scholes
Model, Risk Neutral model … ).

TEACHING METHODOLOGY:

This course will be delivered by a combination of theoretical classes, practices (tutorials) and
other group activities. The delivery mode will be largely interactive. The total estimated 39
contact hours are broken down as follows: 26 hours of lectures and 13 hours of tutorials. The
course material (complimentary notes, practice problems and assignments) will be posted on
ourvle http://ourvle.mona.uwi.edu/

ASSESSMENT:

The course assessment will be divided into two components: a coursework component worth
30% and a final exam worth 70%.

 One coursework examination (1 hour) worth 20% of the final grade


 Two written assignments each worth 5% of the final grade
 The final examination will be two hours in length and consist of compulsory questions.

REFERENCE MATERIAL

Prescribed Text:
John C. Hull, "Options, Futures, and Other Derivatives" (8th Edn), 2009, Prentice-Hall, ISBN:
0135009944

Recommended Text:
Kellison, S.G., The Theory of Interest (Third Edition), 2009, Irwin/McGraw-Hill; ISBN: 978-0-
07338-244-9; Other ISBN: 0073382442

Highly Recommended Text:


Broverman, S. A., Mathematics of Investment and Credit (5th Edn), 2010, ACTEX Publications;
ISBN: 978-1-56698-767-7; other ISBN: 1566987679.

Online resources:
The following are free online lectures which the student may access for revision purposes:
http://www.scribd.com/doc/22351427/The-Theory-of-Interest-Stephen-G-Kellison

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