Pricing Financial Assets (F)
Course content
The course covers valuation of financial assets and derivatives with an emphasis on arbitrage pricing and hedging. Different methods for arbitrage free pricing are introduced with the purpose of providing the student with a toolset that can be utilized most suitably for the valuation problem at hand. The theory and methods are applied to core financial derivatives which are introduced and given a rigorous definition with a further coverage of the institutional settings and conventions that has developed for such contracts and the trading thereof. Derivatives are covered in abstract generality as well as in practical implementations in the form of equity, commodity, currency, credit and interest rate derivatives.
MSc programme in Economics – elective course
The course is part of the Financial line symbolized by
"F".
After completing the course, the student should have acquired the following:
Knowledge:

A knowledge of main types of financial assets and derivatives, of their definitions and of their risk characteristics as well as the institutional framework for such contracts and the trading thereof

An understanding of the concept of arbitrage free pricing, the importance of this approach in modern financial theory, and the various methods that can be applied for such pricing

An understanding of the core mathematical methods related to these models including selected proofs and numerical methods
Skills:

The ability to utilize the methods of arbitrage free pricing to particular pricing and risk hedging problems and to choose the most applicable method

The skill of applying the mathematical toolset to produce quantitative valuations and risk assesments

The ability to understand the limitations of the pricing methods and the risk involved in the practial implementation in both pricing and risk hedging
Competences:

The ability to extract from a complicated practical setting the relevant financial risk elements that can be analyzed and to adapt the methodology to the problem at hand

The ability to apply arbitrage free pricing methods and risk hedging to new financial instruments, their definition and development

To understand the limitiations of different pricing and hedging methodologies and use this to modify the approach and/or make sound judgements on the direction and size of pricing errors and residual, nonhedged risks
Lectures
Main textbook:
John C. Hull: "Options, Futures and Other
Derivatives," 8th edition 2012, Pearson Education,
PrenticeHall. ISBN 9780132164948.
Notes:
Frank Hansen: "Supplements in Finance Theory,” 2009, University of Copenhagen. Can be downloaded from the course website.
Syllabus:
The binomial model; Hull Chapter 12.
The oneperiod model; Suppl. Section 1, pp. 25.
The multiperiod model; Suppl. Section 2, pp. 714.
Wiener processes and Ito's lemma; Hull Chapter 13.
The BlackScholesMerton model; Hull Chapter 14.
Options on stock indices and currencies; Hull Chapter 16.
Futures options; Hull Chapter 17.
The Greek letters; Hull Chapter 18.
Credit risk; Hull Chapter 23.
Credit derivatives; Hull Chapter 24.
Martingales and measures; Hull Chapter 27.
Interest Rate Derivatives: The standard market models; Hull Chapter
28.
Interest Rate Derivatives: Models of the short rate; Hull
Chapter 30.
Interest Rate Derivatives: HJM and LMM; Hull Chapter
31.
The course requires certain knowledge of basic microeconomics and elementary mathematics and statistics. The course also requires the BAcourse in finance, including a knowledge of financial derivatives as forwards, futures and call and put options (as they are covered in the first chapters of the main textbook that are not included in the syllabus).
Schedule:
2 hours of lectures 12 times per week for 14 weeks.
Time and venue:
To see the time and location of lectures please press the
link/links under "Se skema" (See schedule) at the right
side of this page (17F means Spring 2017).
You can find the similar information partly in English at
https://skema.ku.dk/ku1617/uk/module.htm
Select Department: “2200Økonomisk Institut” (and wait for
respond)
Select Module:: “2200F17; [Name of course]”
Select Report Type: List
Select Period: "Forår/Spring – Week 429”
Press: “ View Timetable”
for enrolled students. More information about registration, schedule, rules, courses etc. can be found at the student intranet (KUnet) for courses (English) and student intranet (KUnet) for courses (Danish).
Registration and information for foreign students not enrolled please find more information at Study Economics.
For enkelfagsstuderende sker tilmelding via Åbent Universitet og Merit.
 ECTS
 7,5 ECTS
 Type of assessment

Written examination, 3 hours under invigilationat the computers at the university. The exam assignment is given in English and can be answered in English or in Danish. Language must be chosen at the course or exam registration.
 Aid
 Without aids
 Marking scale
 7point grading scale
 Censorship form
 External censorship
100 % censorship
Criteria for exam assessment
Students are assessed on the extent to which they master the learning outcome for the course.
To receive the top grade, the student must be able to demonstrate in an excellent manner that he or she has acquired and can make use of the knowledge, skills and competencies listed in the learning outcomes.
The exam assessment is subject to the following criteria for an excellent performance (a grade of 12):
Knowledge

The ability to define the types of financial assets and derivatives, of their definitions and of their risk characteristics as well as the institutional framework for such contracts and the trading thereof as covered by the syllabus

The ability to explain the concept of arbitrage free pricing and the various methods that can be applied for such pricing as covered by the syllabus

The ability to explain mathematical and numerical methods related to these models and to reproduce simple proofs
Skills

The ability to use methods of arbitrage free pricing, including both discrete and continuous time models, to select simple pricing and risk hedging problems

The ability to explain the limitations of the pricing methods and give perspectives on risk involved in the practical implementation in a given problem
Competences

The ability to demonstrate the understanding of the financial risk element embedded in a given theoretical or practical problem

The ability to apply arbitrage free pricing methods and risk hedging to such a problem, including to a financial instrument that is a variations on, but not directly included among, instruments covered by the syllabus

The ability to comment on the direction and size of pricing errors and residual, nonhedged risks
Single subject courses (day)
 Category
 Hours
 Lectures
 42
 Preparation
 161
 Exam
 3
 English
 206
Kursusinformation
 Language
 English
 Course number
 AØKK08095U
 ECTS
 7,5 ECTS
 Programme level
 Full Degree Master
 Duration

1 semester
 Price
 Schedulegroup

Teaching:
Spring: Uge 621
Timeschedule: See "Remarks"
Exam and resits: See "Exam"  Studyboard
 Department of Economics, Study Council
 Department of Economics
Course responsible
 Henrik Olejasz Larsen (216a6770746b6d30716e676c63757c306e63747567704267657170306d7730666d)
Teacher
Lectures: See ‘Course responsibles’
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