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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: 4:005:00 pm (or by appointment)
Fall 2011
Course Syllabus
Objectives
This is a
first
graduate course in finance. It gives an introduction to theory of derivative security
(or option) pricing and proceeds in three stages.
First
, fundamental concepts of finance are
introduced, using a discretetime binomial model. These concepts include financial markets,
derivative securities, arbitrage, hedging and replicating portfolios, riskneutral probabilities, risk
neutral pricing formula, and market completeness.
Then
basic ideas of probability and stochastic
processes are reviewed for finite probability spaces and discretetime processes: conditional
expectation, martingales, and Markov processes.
Lastly
, the emphasis of the course is shifted
from a discretetime to continuoustime 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, BlackScholesMerton formulae for a Europeanstyle call option price, change of
measure and Girsanov's Theorem, riskneutral pricing theory, noarbitrage and existence of risk
neutral measure, and market completeness and uniqueness of riskneutral measure.
Prerequisites
There is no formal prerequisite 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
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 Fall '08
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