SF2975 Financial Derivatives 7.5 credits

Finansiella derivat

The overall purpose of the course is that the student should be well acquainted with basic arbitrage theory and the concepts of arbitrage and completeness. The student should be able to critically analyse financial models, for example stock market models and interest rate models.

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Offering and execution

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Course information

Content and learning outcomes

Course contents *

The martingale approach to arbitrage pricing of financial derivatives. Black-Scholes model and extensions thereof. Short rate models. Forward rate models. LIBOR market models. Pricing using the change of numeraire technique.

Intended learning outcomes *

To pass the course, the student should be able to do the following:

  • explain the properties and determine the price of the most common financial derivatives, such as call and put options, bonds and forwards and futures.
  • define martingale measures and use them for pricing financial derivatives.
  • explain and analyse the following models (the assumptions behind them and the limitations these imply) and be able to use them for pricing
    - Black-Scholes model and its extensions, for example to several currencies and to assets paying dividends.
    - Short rate models (especially those with an affine term structure)
    - Forward rate models
    - LIBOR market models
    - Swap rate models
  • use the change of numeraire technique to price financial derivatives

To receive the highest grade, the student should in addition be able to do the following:

  • Combine all the concepts and methods mentioned above in order to solve more complex problems.

Course Disposition

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Literature and preparations

Specific prerequisites *

Passed courses in Probability Theory (SF2940 or correspondning), Martingales and Stochastic Integrals (SF2970 or corresponding), Financial Mathematics (SF2701 or corresponding) and documented proficiency in English corresponding to English B.

Recommended prerequisites

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Equipment

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Literature

Björk, T.:Arbitrage Theory in Continuous Time, 3:rd Ed., Oxford University Press. 

Examination and completion

Grading scale *

A, B, C, D, E, FX, F

Examination *

  • OVN1 - Assignments, 3.0 credits, Grading scale: P, F
  • TEN1 - Examination, 4.5 credits, Grading scale: A, B, C, D, E, FX, F

Based on recommendation from KTH’s coordinator for disabilities, the examiner will decide how to adapt an examination for students with documented disability.

The examiner may apply another examination format when re-examining individual students.

Other requirements for final grade *

A written examination, 4.5 credits and assignments, 3.0 credits

Opportunity to complete the requirements via supplementary examination

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Opportunity to raise an approved grade via renewed examination

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Examiner

Fredrik Viklund

Further information

Course web

Further information about the course can be found on the Course web at the link below. Information on the Course web will later be moved to this site.

Course web SF2975

Offered by

SCI/Mathematics

Main field of study *

Industrial Management, Mathematics

Education cycle *

Second cycle

Add-on studies

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Contact

Fredrik Viklund (frejo@kth.se)

Ethical approach *

  • All members of a group are responsible for the group's work.
  • In any assessment, every student shall honestly disclose any help received and sources used.
  • In an oral assessment, every student shall be able to present and answer questions about the entire assignment and solution.