Optimal Stopping with Applications

Course content

The theory of optimal stopping is concerned with the problem of choosing a time to take a particular action. Some applications are:

  • The valuation/pricing of financial products/contracts  where the holder has the right to exercise the contract at any time before the date of expiration is equivalent  to solving optimal stopping problems. Examples:
    1. American options in finance
    2. Surrender options in life insurance
    3. Prepayment of mortage loans
  • In financial engineering, where the problem is to determine an optimal time to sell an asset. Examples
    1. Optimal prediction problem, to sell the asset when the price is, or close to, the ultimate maximum.
    2. Mean-variance stopping problem, to sell the asset so as to maximise the return and to minimise the risk. 

 

The content of the course.

Optimal stopping:

  • Definitions
  • General theory
  • Methods of solutions

 

Areas of applications:

  • Pricing financial products with exercise feature in mathematical finance and life insurance
  • Financial engineering

 

Education

MSc Programme in Actuarial Mathematics

Learning outcome

Knowledge:

Optimal stopping theory and applications to finance and life insurance

 

Skills:

At the end of the course, the students are expected to be able to

  • Apply general theory of optimal stopping
  • Apply methods for solutions of examples of optimal stopping
  • Pricing American option 

 

Competences:

To make the student operational and to give the student knowledge in applications of optimal stopping in finance and life insurance

 

4 hours of lectures per week for 7 weeks

Book and articles

Continuous time finance

ECTS
7,5 ECTS
Type of assessment
Oral examination
30-minute oral exam without time for preparation
Aid

The student may bring notes to the oral exam, but they are only allowed to consult these in the first minute after they have drawn a question. After that, all notes must be put away. 

Marking scale
7-point grading scale
Censorship form
No external censorship
Several internal examiners.
Criteria for exam assessment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 28
  • Preparation
  • 177
  • Exam
  • 1
  • English
  • 206