This unit builds on the Level 2 unit FINA2204 Derivative Products and Markets to study the kinds of derivatives used in practice, the principles of pricing them, and their applications in the modern financial world. The unit develops the theoretical frameworks, financial, probabilistic and statistical essential to understanding modern practices in derivative pricing and applications such as portfolio insurance, dynamic hedging and risk management. The Black-Scholes-Merton differential equation and the risk-neutral valuation technique are explored in some detail. The unit also introduces credit derivatives and the roles they played in the financial crisis of 2007–2008. -- Course Website
Prerequisites: FINA2204 Derivative Products and Markets and FINA2205 Quantitative Methods for Finance
