ACTSC 970/ACC 770:
Finance I – Foundations of Finance
Tony S. Wirjanto
M3 -3013, x 35210
Email: twirjant at uwaterloo dot ca
Office Hours: Th, Fr: 4:00-5:00 pm (or by appointment)
This is a
graduate course in finance. It gives an introduction to theory of derivative security
(or option) pricing and proceeds in three stages.
, fundamental concepts of finance are
introduced, using a discrete-time binomial model. These concepts include financial markets,
derivative securities, arbitrage, hedging and replicating portfolios, risk-neutral probabilities, risk-
neutral pricing formula, and market completeness.
basic ideas of probability and stochastic
processes are reviewed for finite probability spaces and discrete-time processes: conditional
expectation, martingales, and Markov processes.
, the emphasis of the course is shifted
from a discrete-time to continuous-time framework to cover the main topics in the course. This
includes a summary of probability measure theory and conditional expectation, Brownian motion
and quadratic variation, martingales, Ito integral, stochastic calculus, replicating portfolios and
hedging, Black-Scholes-Merton formulae for a European-style call option price, change of
measure and Girsanov's Theorem, risk-neutral pricing theory, no-arbitrage and existence of risk-
neutral measure, and market completeness and uniqueness of risk-neutral measure.
There is no formal pre-requisite for this course. However students should be familiar with
concepts taught at undergraduate courses on ordinary differential equations, multivariable
calculus, linear algebra, and probability theory. In particular, a good understanding of probability
at the level of the textbook by Sheldon Ross,
A First Course in Probability
, would be a definite
asset. It would also be helpful (but not strictly necessary) if students are well acquainted with