act460 | undergraduate

Financial Economics

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This course prepares students to apply economic models for the evaluation of financial and insurance risks. Binomial models and the Black-Scholes option pricing model are used to evaluate financial derivative securities. Interest rate models are used to evaluate features of bonds and fixed income securities. Simulation methods are used to evaluate insurance and financial products.

This undergraduate-level course is 5 To enroll, speak with an Enrollment Representative.

Course details:

Credits: 3
Continuing education units: XX
Professional development units: XX
Duration: 5

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    The Black-Scholes Option Prices

    • Explain the concept of delta hedging and the role of market makers.
    • Apply the Black-Scholes formula and its derivatives (the "Greeks") and delta hedging to solve financial risk management problems.
    • Explain the Black-Scholes option pricing formula.
    • Apply the Black-Scholes formula to calculate the price of European put and call options.

    Exotic Options and Other Topics

    • Explain Asian, gap and barrier options.
    • Explain exchange options.
    • Explain how simulation methods can be used to determine option prices.
    • Apply the put-call parity principles to determine the relationship between put or call prices at various strike prices or expiration dates.

    Interest Rate Derivatives

    • Explain the distinction between derivatives on bond prices and interest rate derivatives.
    • Apply the Black-Dermond-Toy interest rate tree model to price interest rate derivatives.
    • Explain equilibrium rate (risk neutral) models and their role in interest rate derivative pricing.
    • Apply the Black, Vasicek and CIR models to pricing interest rate derivatives.

    Introduction and Binomial Tree Models

    • Explain the put-call parity and the concept of a replicating portfolio.
    • Explain the binomial model for pricing options including the implied replicating portfolio.
    • Apply the binomial model to determine the price of European put or call options using 2 or more time periods.
    • Apply the binomial model to determine the price of American-style options and options on assets other than stocks.
    • Explain the concept of risk-neutral probability and how it is used in the binomial model.

    Continuous-time Models

    • Explain how the concept of the Brownian motion can be used to model stock prices including the distinction between arithmetic Brownian motion and geometric Brownian motion.
    • Explain the Black-Scholes equation (framework) and how it can be used to model the dynamics of derivative prices.
    • Apply Ito's Lemma to solve problems that involve the dynamics of derivative prices.
    • Explain the Sharpe Ratio and its role in risk neutral pricing models.
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