Valuation of Derivative Assets
Official Course Description
The course consists of three related parts. In the first part we will look at option theory in discrete time. The purpose is to quickly introduce fundamental concepts of financial markets such as free of arbitrage and completeness as well as martingales and martingale measures. We will use tree structures to model time dynamics of stock prices and information flows. In the second part we will study alternative models formulated in continuous time. The models we focus on are formulated as stochastic differential equations (SDE:s). Most of the second part is devoted to the probability theory required to understand the SDE models. This include e.g. Brownian motion, stochastic integrals and Ito's formula. Finally in the third part we study various applications of the theory from part two. Here we come back to option theory and derive e.g. the Black-Scholes formula. After that we will study the bond market and interest rate derivatives.