Fall 2019 - ACMA 440 D100

Models for Financial Economics (3)

Class Number: 4364

Delivery Method: In Person

Overview

  • Course Times + Location:

    Mo 8:30 AM – 10:20 AM
    WMC 3250, Burnaby

    We 8:30 AM – 9:20 AM
    WMC 3250, Burnaby

  • Exam Times + Location:

    Oct 30, 2019
    4:30 PM – 7:30 PM
    AQ 2120, Burnaby

    Dec 16, 2019
    8:30 AM – 11:30 AM
    AQ 5007, Burnaby

  • 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. Black-Scholes-Merton 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 Black-Scholes-Merton Model : The Lognormal Distribution, Assumptions of the Black-Scholes-Merton Model, The Black-Scholes-Merton Formula, Option Greeks.
  • Elementary Stochastic Calculus : Probability Theory, Stochastic Process, Martingale, Markov Process, Brownian Motion, Stochastic Differential Equations, Ito’s Lemma.
  • The Black-Scholes-Merton Equation : Differential Equation and Valuation Under Certainty, The Black-Scholes-Merton Equation, Finite Difference Approximation, The Explicit Finite Difference Method, The Implicit Finite Difference Method, The Crank-Nicolson Method
  • Mean-Variance Portfolio and Asset Pricing : Mathematics of Portfolios, Diversification, Mean-Variance Theory, Capital Asset Pricing Model, Arbitrage Pricing Theory
  • Risk Neutrality and Fundamental Theorems of Asset Pricing : Intuition Behind Risk-Neutral Pricing, Risk-Neutral Pricing and the Binomial Model, Risk-Aversion and Marginal Utility, First-Order 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, All-or-Nothing 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, Continuous-Time Short-Rate Models (Rendelman-Bartter Model, Vasicek Model, Cox, Ingersoll and Ross Model), Interest-Rate 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, Equity-Linked Insurance & Annuities, Pension Funding, Asset-Liability Management.

This course is accredited under the Canadian Institute of Actuaries (CIA) University Accreditation Program (UAP) for the 2019-2020 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.cia-ica.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 12-14, 18-25, 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: Continuous-Time Models. Shreve, S. E. (2004). Springer. Chapters 3-5, 11

Hardcover ISBN: 978-0-387-40101-0
Softcover ISBN: 978-1-4419-2311-0

Volatility and Correlation: The Perfect Hedger and the Fox, 2nd ed. Rebonato, R. (2005). Wiley. Chapters  6-9, 13, 14

Book available on-line through the SFU Library

eBook ISBN: 978-0-470-09140-1
Hardcover ISBN: 978-0-470-09139-5

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 Equity-linked 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 778-782-3112 or csdo@sfu.ca


Tutor Requests:
Students looking for a Tutor should visit http://www.stat.sfu.ca/teaching/need-a-tutor-.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/s10-01.html

ACADEMIC INTEGRITY: YOUR WORK, YOUR SUCCESS