Fall 2020 - ACMA 440 D100

Models for Financial Economics (3)

Class Number: 3731

Delivery Method: In Person

Overview

  • Course Times + Location:

    Mo 8:30 AM – 10:20 AM
    REMOTE LEARNING, Burnaby

    We 8:30 AM – 9:20 AM
    REMOTE LEARNING, Burnaby

  • Exam Times + Location:

    Dec 14, 2020
    3:30 PM – 6:30 PM
    REMOTE LEARNING, 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:

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
  • 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.

Mode of Teaching:

  • Lecture: asynchronous (recorded)
  • Tutorial: asynchronous
  • Tests: synchronous; dates: TBA
  • Final exam: synchronous; date: TBA

This course is accredited under the Canadian Institute of Actuaries (CIA) University Accreditation Program (UAP). Achievement of the minimum required grades in accredited courses may provide credit for preliminary exams. Please note that a combination of courses may be required to achieve exam credit. Details of required courses and grades at Simon Fraser University are available here (https://www.cia-ica.ca/membership/university-accreditation-program-home/accredited-universities/accredited-university-detail?pav_universityid=236ca8c4-60e5-e511-80b9-00155d111030).

In addition to the specific university’s internal policies on conduct, including academic misconduct, candidates pursuing credits for writing professional examinations shall also be subject to the Code of Conduct and Ethics for Candidates in the CIA Education System and the associated Policy on Conduct and Ethics for Candidates in the CIA Education System. For more information, please visit Obtaining UAP Credits (https://www.cia-ica.ca/membership/university-accreditation-program---home/information-for-candidates/obtaining-uap-credits) and the CIA FAQ (www.cia-ica.ca/docs/default-source/miscellaneous/uap/2018-uap-faq-and-career-brochure.pdf).

Grading

  • Assignments 10%
  • Term Project 10%
  • Tests 50%
  • Final Exam 30%

NOTES:

The virtual tests and the final exam will be proctored. Specifically, we will be using Zoom which in many ways is equivalent to live proctoring for in-person exams. The session will not be recorded. Students should be muted to minimize background noise (invigilators can randomly unmute at any time), be instructed to turn off virtual backgrounds, and that they must not turn off cameras. We may ask students to show their work area before starting the exam, and should remind students to set aside cell phones or other devices.

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.

Academic Dishonesty:
Students are expected to take responsibility for their learning. To assist students in understanding scholarly expectations, the following actions are examples of violations of the Student Academic Integrity Policy. Please note that this list is not exhaustive.

  • Plagiarism
  • Submitting shared work as individual work (i.e, collusion)
  • Submitting an assignment or paper more than once (i.e, cheating)
  • Cheating during an exam: Using any device/mobile phone to receive or share information during the exam
  • Submitting a purchased assignment or essay (i.e, contract cheating)
  • Falsifying documents (e.g., Doctor’s note) to gain an advantage Accessing exam information from an unauthorized source (i.e., pay to pass)
For further details, visit https://www.sfu.ca/students/academicintegrity/what-is-it.html.

REQUIREMENTS:

Access to high-speed internet, webcam

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

Corporate Finance. 4th ed. Berk, J. and DeMarzo, P. (2016). Publisher: Pearson.

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:

ACADEMIC INTEGRITY: YOUR WORK, YOUR SUCCESS

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

TEACHING AT SFU IN FALL 2020

Teaching at SFU in fall 2020 will be conducted primarily through remote methods. There will be in-person course components in a few exceptional cases where this is fundamental to the educational goals of the course. Such course components will be clearly identified at registration, as will course components that will be “live” (synchronous) vs. at your own pace (asynchronous). Enrollment acknowledges that remote study may entail different modes of learning, interaction with your instructor, and ways of getting feedback on your work than may be the case for in-person classes. To ensure you can access all course materials, we recommend you have access to a computer with a microphone and camera, and the internet. In some cases your instructor may use Zoom or other means requiring a camera and microphone to invigilate exams. If proctoring software will be used, this will be confirmed in the first week of class.

Students with hidden or visible disabilities who believe they may need class or exam accommodations, including in the current context of remote learning, are encouraged to register with the SFU Centre for Accessible Learning (caladmin@sfu.ca or 778-782-3112).