Fall 2019  ACMA 440 D100
Models for Financial Economics (3)
Class Number: 4364
Delivery Method: In Person
Overview

Course Times + Location:
Sep 3 – Dec 2, 2019: Mon, 8:30–10:20 a.m.
BurnabySep 3 – Dec 2, 2019: Wed, 8:30–9:20 a.m.
Burnaby 
Exam Times + Location:
Oct 30, 2019
Wed, 4:30–7:30 p.m.
BurnabyDec 16, 2019
Mon, 8:30–11:30 a.m.
Burnaby

Instructor:
JeanFrancois Begin
jbegin@sfu.ca
778 7824478
Office: SCK10548

Prerequisites:
ACMA 320 and ACMA 340.
Description
CALENDAR DESCRIPTION:
Advanced actuarial models and their application to insurance and financial risks. Introduction to stochastic calculus: Ito's lemma, risk neutrality. Fundamental theorems of asset pricing. BlackScholesMerton partial differential equations. Exotic options. Monte Carlo methods. Advanced option pricing models. Implied volatility. Actuarial applications. Covers part of the syllabus for Exam IFM of the Society of Actuaries. This course is accredited under the University Accreditation Program of the Canadian Institute of Actuaries. Quantitative.
COURSE DETAILS:
Some classes will take place in lieu of the tutorial session. These will be announced during the first lecture of the semester.
Outline:
This course covers financial and actuarial models and their applications to insurance and financial risks. The topics covered include:
 The BlackScholesMerton Model : The Lognormal Distribution, Assumptions of the BlackScholesMerton Model, The BlackScholesMerton Formula, Option Greeks.
 Elementary Stochastic Calculus : Probability Theory, Stochastic Process, Martingale, Markov Process, Brownian Motion, Stochastic Differential Equations, Ito’s Lemma.
 The BlackScholesMerton Equation : Differential Equation and Valuation Under Certainty, The BlackScholesMerton Equation, Finite Difference Approximation, The Explicit Finite Difference Method, The Implicit Finite Difference Method, The CrankNicolson Method
 MeanVariance Portfolio and Asset Pricing : Mathematics of Portfolios, Diversification, MeanVariance Theory, Capital Asset Pricing Model, Arbitrage Pricing Theory
 Risk Neutrality and Fundamental Theorems of Asset Pricing : Intuition Behind RiskNeutral Pricing, RiskNeutral Pricing and the Binomial Model, RiskAversion and Marginal Utility, FirstOrder Condition for Portfolio Selection, Change of Measure and Change of Numéraire, The Girsanov Theorem, Fundamental Theorems of Asset Pricing
 More on Exotic Options: Asian Options, AllorNothing Options, Barrier Options, Monte Carlo Simulation.
 Advanced Option Pricing Models : Measurement and Behaviour of Volatility, Autoregressive Conditional Heteroskedasticity, Generalized ARCH, The Cox Model, The Merton (1976) Model, The Heston (1993) Model, The Bates (1996) Model, The Heston and Nandi (2000) Model
 Interest Rate Modelling and Derivatives : Introduction to Interest Rate Derivatives, Interest Rate Derivatives and the BSM Approach, ContinuousTime ShortRate Models (RendelmanBartter Model, Vasicek Model, Cox, Ingersoll and Ross Model), InterestRate Trees (Black, Derman and Toy Model, Hull and White Model)
 Implied Volatility and Empirical Issues : Implied Volatility, Volatility Smiles, Hedging in the Presence of Volatility Smiles, Empirical Facts on Equity Volatility Smiles, Model Calibration
 Actuarial Applications : Applications to Life Insurance, Applications to P&C Insurance, EquityLinked Insurance & Annuities, Pension Funding, AssetLiability Management.
This course is accredited under the Canadian Institute of Actuaries (CIA) University Accreditation Program (UAP) for the 20192020 academic year. Achievement of the established exemption grade in this course may qualify a student for exemptions from writing certain preliminary exams. Please note, a combination of courses may be required to achieve a single exemption. Please see http://www.ciaica.ca/membership/uap for full details.
Grading
 Assignments 10%
 Term Project 10%
 Midterm 1 35%
 Final Exam 45%
NOTES:
The pass mark is 50%. The final grade will be allocated according to the student’s achievement in the course. Under no circumstances will late assignments be accepted.
All above grading is subject to change.
Materials
REQUIRED READING:
Derivatives Markets, 3rd ed. Author: McDonald, R.L. (2013). Publisher: Pearson.
Chapters 1214, 1825, Appendices B and C.
eBook ISBN: 9780134234960
Book ISBN: 9780321543080
RECOMMENDED READING:
Options, Futures, and Other Derivatives. Hull, J. C. (2006). Pearson. Chapters 14, 15, 19, 20, 28, 31.
eBook ISBN: 9780134234939
Book ISBN: 9780133456318
Stochastic Calculus for Finance II: ContinuousTime Models. Shreve, S. E. (2004). Springer. Chapters 35, 11
Hardcover ISBN: 9780387401010
Softcover ISBN: 9781441923110
Volatility and Correlation: The Perfect Hedger and the Fox, 2nd ed. Rebonato, R. (2005). Wiley. Chapters 69, 13, 14
Book available online through the SFU Library
eBook ISBN: 9780470091401
Hardcover ISBN: 9780470091395
Interest Rate Models  Theory and Practice: With Smile, Inflation and Credit. Brigo, D. & Mercurio, F. (2007). Springer. Chapters 1, 3.
Investment Guarantees: Modeling and Risk Management for Equitylinked Life Insurance. Hardy, M. (2003). Wiley. Chapters 1, 8, 13.
Department Undergraduate Notes:
Students with Disabilites:
Students requiring accommodations as a result of disability must contact the Centre for Accessible Learning 7787823112 or csdo@sfu.ca
Tutor Requests:
Students looking for a Tutor should visit http://www.stat.sfu.ca/teaching/needatutor.html. We accept no responsibility for the consequences of any actions taken related to tutors.
Registrar Notes:
SFU’s Academic Integrity web site http://www.sfu.ca/students/academicintegrity.html is filled with information on what is meant by academic dishonesty, where you can find resources to help with your studies and the consequences of cheating. Check out the site for more information and videos that help explain the issues in plain English.
Each student is responsible for his or her conduct as it affects the University community. Academic dishonesty, in whatever form, is ultimately destructive of the values of the University. Furthermore, it is unfair and discouraging to the majority of students who pursue their studies honestly. Scholarly integrity is required of all members of the University. http://www.sfu.ca/policies/gazette/student/s1001.html
ACADEMIC INTEGRITY: YOUR WORK, YOUR SUCCESS