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ACST817 – Quantitative Asset and Liability Modelling 2

2017 – S2 Day

General Information

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Unit convenor and teaching staff Unit convenor and teaching staff Unit Convenor
Jiwook Jang
E4A 613
Weekly Discussion Board
Tutor and Teaching Assistant
Daniel Chew
Credit points Credit points
4
Prerequisites Prerequisites
ACST603 or (admission to MActPrac post 2014)
Corequisites Corequisites
ACST851 and (STAT806 or STAT810)
Co-badged status Co-badged status
Unit description Unit description
The topics covered in this unit include: an introduction to stochastic processes; martingales; an introduction to stochastic calculus; Ito's lemma; forwards, futures, swaps and options; binomial lattice models; arbitrage-free pricing via replicating portfolio and risk neutral probability measures; the Girsanov theorem; the Black-Scholes option pricing model for European and exotic options; the Girsanov theorem; the 'Greeks' and dynamic hedging; American and exotic option pricing; term structure of interest rates; relations among short rates, forward rates and default-free zero-coupon bonds; interest rate models; firm-value and intensity-based credit risk models. Students gaining a grade of credit or higher in both ACST816 and ACST817 are eligible for exemption from subject CT8 of the professional exams of the Institute of Actuaries of Australia.

Important Academic Dates

Information about important academic dates including deadlines for withdrawing from units are available at http://students.mq.edu.au/student_admin/enrolmentguide/academicdates/

Learning Outcomes

  1. Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  2. Understanding of forward, futures, option and swap.
  3. Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  4. Pricing default-free zero-coupon bond using short rate of interest models.
  5. Defaultable zero-coupon bond pricing based on firm-value and default intensity: structural model and reduced form model.

General Assessment Information

GradeBook

Assignment and class test mark are available on GradeBook. It is the responsibility of students to view their marks for each within session assessment on iLearn within 20 working days of posting. If there are any discrepancies, students must contact the unit convenor immediately. Failure to do so will mean that queries received after the release of final results regarding assessment marks (not including the final exam mark) will not be addressed."

 

Feedback Prior to the Census Date

Self-assessment exercise question(s) will be released in Week 3 for feedback prior to the census date.  Its answer will be also provided before the census date in Week 4.

 

Assessment criteria for all assessment tasks will be provided on the unit iLearn site.

Assessment Tasks

Name Weighting Due
Class Test 1 5% Friday 2 September 1:00pm
Assignment 15% Monday 11 September 2:00pm
Class Test 2 20% Monday 23 October 2:00pm
Final Examination 60% University Examination period

Class Test 1

Due: Friday 2 September 1:00pm
Weighting: 5%

Class test 1 will be 45 minutes written papers with no reading time, held during the tutorial time.

No materials will be allowed to take into the class test 1. Non-programmable calculators with no text-retrieval capacity are allowed. Dictionaries are not permitted.

No extensions will be granted. Students who have not submitted the task prior to the deadline will be awarded a mark of 0 for the task, except for cases in which an application for disruptions to studies is made and approved.

 

 


This Assessment Task relates to the following Learning Outcomes:
  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.

Assignment

Due: Monday 11 September 2:00pm
Weighting: 15%

Assignment has to be submitted via both on iLearn and ACST307/817 Assignment Box in BESS.

No extensions will be granted. There will be a deduction of 10% of the total available marks made from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late in submission -- 20% penalty). This penalty does not apply for cases in which an application for disruption of studies is made and approved. No submission will be accepted after solutions have been posted.


This Assessment Task relates to the following Learning Outcomes:
  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.

Class Test 2

Due: Monday 23 October 2:00pm
Weighting: 20%

Class test 2 will be 95 minutes written papers with no reading time, held during the lecture time.

You are permitted ONE A4 page of paper containing reference material printed on both sides. The material may be handwritten or typed. The page will be returned at the end of the class test 2.  Non-programmable calculators with no text-retrieval capacity are allowed.  Dictionaries are not permitted.

No extensions will be granted. Students who have not submitted the task prior to the deadline will be awarded a mark of 0 for the task, except for cases in which an application for disruptions to studies is made and approved. 


This Assessment Task relates to the following Learning Outcomes:
  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  • Pricing default-free zero-coupon bond using short rate of interest models.

Final Examination

Due: University Examination period
Weighting: 60%

The final examination will be a three-hour written exam with ten minutes reading time, held during the University Examination period.

You are permitted ONE A4 page of paper containing reference material printed on both sides. The material may be handwritten or typed. The page will be returned at the end of the final examination.  Non-programmable calculators with no text-retrieval capacity are allowed.  Dictionaries are not permitted.

 


This Assessment Task relates to the following Learning Outcomes:
  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  • Pricing default-free zero-coupon bond using short rate of interest models.
  • Defaultable zero-coupon bond pricing based on firm-value and default intensity: structural model and reduced form model.

Delivery and Resources

Classes

This unit consist of 2 hours of lectures and 2 hours tutorial per week, Lectures are held at the following times: Monday 2:00-4:00pm E7B T2.

ACST817 Tutorials are held at the following times, commencing in Week 2:

Friday 12:00-2:00pm E8A 188 (Jiwook Jang)

You must attend the tutorial class. The tutorial is an opportunity for you to attempt the section exercises given at the end of each section of work, and to discuss problems with the tutor.

There is no tutorial held during Week 1.  Tutorial commences in Week 2.

Any alterations to the class times or locations will be advised in lectures and via the website - the link to the Timetables portal: http://timetables.mq.edu.au

 

Required and Recommended Texts and/or Materials Prescribed

Required texts

Lecture materials are available for downloading from ACST307/817 teaching website.

Recommended Textbooks

•Options, Futures and Other Derivatives (7th edition); John Hull

•An Introduction to the Mathematics of Financial Derivatives (2nd edition); Salih N. Neftci

•Interest Rate Models: An Introduction; Andrew J. G. Cairns

 

Each copy of these books is available in the Reserve section of the Library and can be purchased from the Macquarie University Co-op bookshops

 

Optional ActEd material

• The ActEd CT8, that can be purchased directly from ActEd. 

Advanced Textbooks

•Risk-Neutral Valuation - Pricing and Hedging of Financial Derivatives (1st Edition ); N. H. Bingham and R. Kiesel

•Quantitative Risk Management; Alexander J. McNeil, Rüdiger Frey and Paul Embrechts

•The Theory of Stochastic Processes; D. R. Cox and H. D. Miller

•Introduction to Probability Models (8th edition); Sheldon Ross

Technology Used and Required

Students need to be able to use a computer to analyse financial problems.  You should be able to use a word processing package (such as WORD), a spreadsheet (such as EXCEL), a statistical package (such as MINITAB) and a programming language (such as Visual Basic or Matlab).  Although the unit does not aim to teach students how to use computers, as this is covered in prerequisite units, you are encouraged to make use of spreadsheets and other software packages for the assignment.

Unit Web Page

To access the website, go to http://ilearn.mq.edu.au and login using your usual login and password.

Teaching and Learning Strategy

The unit is taught using two-hour lecture and two-hour tutorial each week.  You are expected to read lecture materials in advance of the lectures.  The tutorial is an opportunity for you to attempt questions for each section of work, or to ask questions. It is highly recommended to try to solve questions in advance of the tutorials. In addition to the tutorial, you should use the Discussion Board to ask questions or discuss concepts covered in the unit.

 

Changes since the Last Offering of this Unit

Nil.

Unit Schedule

Week Lecture Topics

1. Introduction of Stochastic Processes

2. Introduction of Stochastic Processes

3. Martingale, Introduction of Stochastic Calculus, Ito's lemma

4. Black-Scholes Option Pricing Model via Replication

5. Black-Scholes Option Pricing Model via Risk Neutral Probability Distribution, Combination of options  (Class Test 1 - Friday 1 September 1:00pm)

6. Greeks and Dynamic Hedging, Exotic Option Pricing

7. Interest Rate Models I (Short Rate Models) (Assignment due: Monday 11 September 2:00pm)

Semester Break

8. Labour Day (Monday 2 October)

9. Interest Rate Models II (Forward Rate Models) 

10. Credit Risk Models I (Firm-Value Model)

11. Class Test 2 (Monday 23 October 2:00pm)

12. Credit Risk Models II (Intensity-based Model)

13. Revision

Policies and Procedures

Macquarie University policies and procedures are accessible from Policy Central. Students should be aware of the following policies in particular with regard to Learning and Teaching:

Academic Honesty Policy http://mq.edu.au/policy/docs/academic_honesty/policy.html

Assessment Policy http://mq.edu.au/policy/docs/assessment/policy_2016.html

Grade Appeal Policy http://mq.edu.au/policy/docs/gradeappeal/policy.html

Complaint Management Procedure for Students and Members of the Public http://www.mq.edu.au/policy/docs/complaint_management/procedure.html​

Disruption to Studies Policy http://www.mq.edu.au/policy/docs/disruption_studies/policy.html The Disruption to Studies Policy is effective from March 3 2014 and replaces the Special Consideration Policy.

In addition, a number of other policies can be found in the Learning and Teaching Category of Policy Central.

Student Code of Conduct

Macquarie University students have a responsibility to be familiar with the Student Code of Conduct: https://students.mq.edu.au/support/student_conduct/

Results

Results shown in iLearn, or released directly by your Unit Convenor, are not confirmed as they are subject to final approval by the University. Once approved, final results will be sent to your student email address and will be made available in eStudent. For more information visit ask.mq.edu.au.

Supplementary Exams  

Further information regarding supplementary exams, including dates, is available here http://www.businessandeconomics.mq.edu.au/current_students/undergraduate/how_do_i/disruption to studies.

Student Support

Macquarie University provides a range of support services for students. For details, visit http://students.mq.edu.au/support/

Learning Skills

Learning Skills (mq.edu.au/learningskills) provides academic writing resources and study strategies to improve your marks and take control of your study.

Student Enquiry Service

For all student enquiries, visit Student Connect at ask.mq.edu.au

Equity Support

Students with a disability are encouraged to contact the Disability Service who can provide appropriate help with any issues that arise during their studies.

IT Help

For help with University computer systems and technology, visit http://www.mq.edu.au/about_us/offices_and_units/information_technology/help/

When using the University's IT, you must adhere to the Acceptable Use of IT Resources Policy. The policy applies to all who connect to the MQ network including students.

Graduate Capabilities

PG - Discipline Knowledge and Skills

Our postgraduates will be able to demonstrate a significantly enhanced depth and breadth of knowledge, scholarly understanding, and specific subject content knowledge in their chosen fields.

This graduate capability is supported by:

Learning outcomes

  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  • Pricing default-free zero-coupon bond using short rate of interest models.
  • Defaultable zero-coupon bond pricing based on firm-value and default intensity: structural model and reduced form model.

Assessment tasks

  • Class Test 1
  • Assignment
  • Class Test 2
  • Final Examination

PG - Critical, Analytical and Integrative Thinking

Our postgraduates will be capable of utilising and reflecting on prior knowledge and experience, of applying higher level critical thinking skills, and of integrating and synthesising learning and knowledge from a range of sources and environments. A characteristic of this form of thinking is the generation of new, professionally oriented knowledge through personal or group-based critique of practice and theory.

This graduate capability is supported by:

Learning outcomes

  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  • Pricing default-free zero-coupon bond using short rate of interest models.
  • Defaultable zero-coupon bond pricing based on firm-value and default intensity: structural model and reduced form model.

Assessment tasks

  • Class Test 1
  • Assignment
  • Class Test 2
  • Final Examination

PG - Research and Problem Solving Capability

Our postgraduates will be capable of systematic enquiry; able to use research skills to create new knowledge that can be applied to real world issues, or contribute to a field of study or practice to enhance society. They will be capable of creative questioning, problem finding and problem solving.

This graduate capability is supported by:

Learning outcomes

  • Understanding of random walk, Brownian motions, martingale, stochastic calculus and Ito's lemma.
  • Understanding of forward, futures, option and swap.
  • Pricing European, American and Exotic options via the Black-Scholes option pricing model (continuous time model), Hedging via the Greeks.
  • Pricing default-free zero-coupon bond using short rate of interest models.
  • Defaultable zero-coupon bond pricing based on firm-value and default intensity: structural model and reduced form model.

Assessment tasks

  • Class Test 1
  • Assignment
  • Class Test 2
  • Final Examination

Research and Practice

· This unit uses research from external sources:

- Black, Fischer and Scholes, Myron. (1973): "The Pricing of Options and Corporate Liabilities". Journal of Political Economy, 81 (3): 637–654.

- Harrison, J. M., Kreps, D. M. (1979): "Martingales and arbitrage in multiperiod markets". J. Econ. Theory, 20, 381–408.

- Cox, J.C., J.E. Ingersoll and S.A. Ross (1985). "A Theory of the Term Structure of Interest Rates", Econometrica, 53: 385–407.

- Heath, D., Jarrow, R. and Morton, A. (1992). Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation, Econometrica, 60(1), 77-105.

- Merton, Robert C. (1974): "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates", Journal of Finance, Vol. 29, No. 2, 449-470.

- Jarrow, R. A., Lando, D. and Turnbull, S. M. (1997), A Markov Model for the Term Structure of Credit Risk Spreads, Review of Financial Studies, 10(2), 481–523.

· This unit gives you opportunities to conduct your own research.

· Professional practice in the area of options, market making and arbitrage will be covered by the guest lecturer, Mr. Jordan Brell in Optiver.

 

Changes since First Published

Date Description
01/08/2017 Class Test 1 will be held on Friday 2 September 1:00pm, not 5:00pm.