The course provides an overview of the most important classes of financial contracts that are traded either on exchanges of over-the counter between financial institutions and their clients. We discuss option of European and American style, futures contracts and forward contracts. The basic ideas of arbitrage pricing are studied in the framework of the classical Cox-Ross-Rubinstein binominal model of stock price.
Subsequently, we analyse the valuation and hedging of European and American options and general contingent claims. We also prove the so-called fundamental theorems of asset pricing for finite models of security markets which furnish a theoretical underpinning of the modern theory of derivatives pricing in stochastic models of security markets.

This course is a pre-requisite for MATH5816 Continuous Time Financial Modelling.

Pre-requisites: 24 units of level III mathematics or a degree in a numerate discipline or permission of the Head of Department.