• Offered by Rsch Sch of Finance, Actuarial Studies & App Stats
• ANU College ANU College of Business and Economics
• Course subject Financial Management
• Areas of interest Finance
• Course convener
• Dr Kevin Lu
• Mode of delivery In Person
• Offered in Second Semester 2019
Advanced Derivatives Pricing and Applications (FINM3007)

This is an advanced course in derivatives pricing and hedging, and their applications. The aim is to cover topics such as: advanced features of the Black-Scholes model, including exotic options and derivatives dependent on the same Brownian motion; some bivariate/multivariate theory (normal distribution, Brownian motion in 2 dimensions), as needed for pricing options on correlated assets; Rubinstein's binomial pyramid for approximating a bivariate GBM; change of numeraire and equivalent martingale measures; optimal stopping theory as needed for American option pricing; hedging concepts in this context; alternatives to Black-Scholes models; local volatility models, jump diffusion and GARCH models. There will be an emphasis on early exercise options, and some time will be spent on the mathematical/stochastic foundations necessary for understanding these and other applications. Some Value-at-Risk concepts may be introduced, and applied to portfolios containing derivatives. Credit derivatives may also be discussed.

## Learning Outcomes

Upon successful completion, students will have the knowledge and skills to:

1. Use Brownian motion, martingales and Ito's formula.
2. Use alternatives to Black-Scholes models such as local volatility, jump diffusion and GARCH models.
3. Apply the arbitrage-free approach to the pricing of options, including exotic options, using the basic mathematical tools required, and demonstrate an understanding of how these options are used in financial practice.
4. Value options on correlated assets, including the mathematical/stochastic foundations necessary.
5. Demonstrate an understanding of the theory and use of early exercise options, including the use of optimal stopping theory.

## Indicative Assessment

1. Typical assessment may include, but is not restricted to: assignments and a final exam. (100) [LO 1,2,3,4,5]

The ANU uses Turnitin to enhance student citation and referencing techniques, and to assess assignment submissions as a component of the University's approach to managing Academic Integrity. While the use of Turnitin is not mandatory, the ANU highly recommends Turnitin is used by both teaching staff and students. For additional information regarding Turnitin please visit the ANU Online website.

Students are expected to commit at least 10 hours per week to completing the work in this course. This will include at least 3 contact hours per week and up to 7 hours of private study time.

Not applicable

## Requisite and Incompatibility

To enrol in this course you must have completed FINM3003.

## Prescribed Texts

John Hull, Options Futures and Other Derivatives: Global Edition, 8e, 2012.

Risk Neutral Valuation, Bingham, N. and Kiesel, R., Springer, 2004.

Intro. to Stochastic Calculus with Applications., F. Klebaner, Imp. Coll. Press, 1998.

Elementary Stochastic Calculus with Finance in View, T. Mikosch, World Scientific, 1998.

Financial Calculus, M.W. Baxter and A.J.O. Rennie, Cambridge Univ. Press, 1996.

Options Markets, J. C. Cox and Mark Rubinstein, Prentice-Hall, 1985.

Levy Processes in Finance: Pricing Financial Derivatives, W. Schoutens, Wiley, 2003.

Option Valuation, R. Gibson, McGraw-Hill, 1991

Financial Derivatives, R. W. Cobb, Blackwell, 1996.

Derivative Securities, R. Jarrow and S. Turnbull, Thomson Learning, 2000.

Value at Risk: the New Benchmark for Managing Financial Risk, P. Jorion, 2nd Ed., New York: McGraw-Hill, 2001.

## Fees

Tuition fees are for the academic year indicated at the top of the page.

If you are a domestic graduate coursework or international student you will be required to pay tuition fees. Tuition fees are indexed annually. Further information for domestic and international students about tuition and other fees can be found at Fees.

Student Contribution Band:
3
Unit value:
6 units

If you are an undergraduate student and have been offered a Commonwealth supported place, your fees are set by the Australian Government for each course. At ANU 1 EFTSL is 48 units (normally 8 x 6-unit courses). You can find your student contribution amount for each course at Fees.  Where there is a unit range displayed for this course, not all unit options below may be available.

Units EFTSL
6.00 0.12500

## Course fees

Domestic fee paying students
Year Fee
2019 \$4140
International fee paying students
Year Fee
2019 \$5460
Note: Please note that fee information is for current year only.

## Offerings, Dates and Class Summary Links

ANU utilises MyTimetable to enable students to view the timetable for their enrolled courses, browse, then self-allocate to small teaching activities / tutorials so they can better plan their time. Find out more on the Timetable webpage.

The list of offerings for future years is indicative only.
Class summaries, if available, can be accessed by clicking on the View link for the relevant class number.

### Second Semester

Class number Class start date Last day to enrol Census date Class end date Mode Of Delivery Class Summary
7690 22 Jul 2019 29 Jul 2019 31 Aug 2019 25 Oct 2019 In Person View