The course will comprise a comprehensive treatment of some foundational topics in the field of discrete and continuous time market theory and derivatives pricing.  The emphasis will be on risk-neutral valuation via no-arbitrage pricing and associated hedging principles. Issues concerning pricing in incomplete markets, including stochastic volatility models and processes with jumps, will also be considered, as will early-exercise using the Snell envelope and optimal stopping techniques. Applications will be made to various kinds of exotic options and other derivatives. Other topics may include aspects of credit risk, interest rate theory, value at risk, etc. The course will include a component in the specific probabilistic background needed for an understanding at this level, including some basic material on continuous time stochastic processes, martingales, stochastic differential equations, Ito processes, and the Ito calculus.

The assessment for this course is proposed to be made on the following basis:  A final examination (75%) and 6 assignments, assessed fortnightly throughout the semester.  The best 5 assignments will be worth 5% of the total mark each, the lowest mark will be dropped.

At least three contact hours per week.

For further information please refer to http://ecocomm.anu.edu.au/courses/course.asp?code=FINM3007