MATH 3FM3 Information Sheet (Fall 2012)

Instructor: Dr. Adrien Nguyen Huu

Office: HH414 Phone: x26056 Email: anguyen@math.mcmaster.ca Section: Tu, Th Fr 11.30 12.20 HH/305 Office Hours: Fr 14.00 15.00 or by appointment.

Textbook:
There is one required text for the course : 1. Stochastic calculus for finance I: The binomial asset pricing model, by Steven Shreve, Springer. You can find additional ressources : 2. Stochastic calculus for finance II: Continuous-time models, by Steven Shreve. 3. in probabilities : Probabilities with martingales, by David Williams, Cambridge University Press 4. in finance : Options, Futures and other derivatives, by John Hull. Students are warmly invited to buy and follow item n1.

Topics:
Bonds and stocks, options and forwards, no arbitrage condition, binomial asset pricing model, portfolio strategies, stochastic processes, conditional expectation, martingales, risk neutral pricing formula, complete markets, incomplete markets, American options, Brownian motion, It calculus, the BlackScholes formula.

Course outline:
Warning : this syllabus IS Not DEFINITIVE and will change regarding the evolution of the course and students progression. 1. Introduction to Arbitrage Pricing Theory : interest rates and zero coupon bond, assumptions, self-financed portfolio, arbitrage condition, Call-Put parity, Forward Price 2. One period Binomial model : probabilistic setting, expectation, contingent claims, actualized value, portfolio strategy, risk neutral probability, first step to pricing and hedging 3. Multiperiod Binomial model : stochastic processes and martingales, conditional expectation, market model, risk neutral probability, pricing and hedging of a contingent claim 4. (to be confirmed) No arbitrage in infinite state space in discrete time : Dalang-Morton-Willinger theorem, super-hedging theorem, complete and incomplete markets 5. American options in complete market : supermartingales, snell's enveloppe, optimal stopping and optimal strategy. 6. Stochastic calculus for finance : processes and filtrations, martingales, Brownian motion, quadratic variation, stochastic integral, It formula, It processes, SDEs 7. Black-Scholes : model, equations, formula.

Assignments and tutorials:

There will be approximately 5 Assignments to be handed in during the term. Further details to come. Tutorials migh be provided during the lecture, depending on the evolution of the course.

Tests:
There will be one test during the term : You MUST bring your student ID to each test. The standard McMaster calculator Casio fx991 must be used during tests. The test is TENTATIVELY set for early November. TBA.

Final Examination:
The final examination (duration 3 hours) will be scheduled by the registrar. Location and topics covered will be announced on the course webpage.

Marking scheme:
Final examination 50%; Mid-term test 20% each; Assignments 25%; Attendance 5%;

Official Policies:
1. Exemptions from course work - Students seeking an exemption for an assignment or mid-term test must contact the office of the Associate Dean (Studies) of their Faculty within a week from the due date of the assignment or project or the test date with proper documentation, e.g., a doctor's note. The section instructor will act on the exemption only after receiving official communication from the relevant Associate Dean's office that the grounds for exemption have been accepted. Deferrals for the final exam are handled exclusively by the Associate Dean's office. The percentages for exempted assignments, projects and tests will be transferred to the final exam. 2. Late assignments and projects will not be graded. 3. Calculators - Only the McMaster standard calculator, the Casio fx 991, may be used during the tests and the final exam. 4. ID cards - Students must bring their McMaster ID card to every test and to the final exam for inspection. 5. Academic ethics Academic dishonesty consists of misrepresentation by deception or by other fraudulent means and can result in serious consequences, e.g., the grade of zero on an assignment, loss of credit with a notation on the transcript (notation reads: "Grade of F assigned for academic dishonesty"), and/or suspension or expulsion from the university. It is your responsibility to understand what constitutes academic dishonesty. For information on the various kinds of a academic dishonesty please refer to the Academic Integrity Policy specifically Appendix 3. The following illustrates only three forms of academic dishonesty: 1. Plagiarism, e.g., the submission of work that is not one's own or for which other credit has been obtained. 2. Improper collaboration in group work. 3. Copying or using unauthorized aids in tests and examinations. 6. Modifications and updates. The instructor and University reserve the right to modify elements of the course during the term. The University may change the dates and deadlines for any or all courses in extreme circumstances. If either type of modification becomes necessary, reasonable notice and communication with the students will be given with explanation and the opportunity to comment on the changes. It is the responsibility of all students to check their McMaster email accounts and course webpages weekly during the term and to note any changes. 7. Abscences *Requests for Relief for Missed Academic Term Work for absences from classes lasting up to 5 days :* Using the Mcmaster student abscence form (MSAF) on-line, self-reporting tool, undergraduate students may report abscences lasting up to 5 days and may also request relief for missed academic work. The submission of medical or other types of supporting documentation is normally required. Students may se this tool to submit a maximum of one request for relief of missed academis work per term. Students must immediately follow up with their course instructors regarding the nature of the relief. Failure to do so may negate the opportunity for relief It is the prerogative of the instructor of the course to determine the appropriate relief for missed term work in his/her course. Students who are absent more than five days cannot use the on-line, selfreporting tool to request relief. They MUST report to their Faculty Office to discuss their situation and may required to provide appropriate supporting documentation. If warranted, students will be approved to use a discretionary version of the MSAF on-line, self-reporting tool. Please note the the MSAF may not be used for term work worth 30% or more, nor can it be used for the final examination.