IE 526 - Stochastic Calculus in Finance

Semesters Offered

Stochastic Calculus in FinanceIE526F53010LCD -    Richard B Sowers

Official Description

Stochastic calculus approach to the pricing and risk management of derivative securities; no arbitrage pricing; Brownian motion; stochastic calculus; the Black-Scholes-Merton mode; risk neutral valuation; Feynman-Kac theorem; transform methods; exotic derivatives; change of numeraire; term structure interest rate mode; stochastic volatility and jump models. Course Information: Prerequisite: IE 525.

Course Description

Stochastic calculus is the foundation of financial engineering. IE 526 covers the basics of stochastic calculus and its applications in financial engineering. This course is restricted to the Master of Science in Financial Engineering students. The materials covered in IE 526 include: basics of derivative securities, no arbitrage pricing, binomial model and risk neutral valuation, conditional expectation, stochastic process, Brownian motion, Ito formula, Black-Scholes-Merton model and risk neutral valuation, Greeks, Fourier methods for options valuation, PDE approach and numerical solution, volatility smiles, stochastic volatility and jump models, change of numeraire, American options valuation, and jump process and Ito formula. The course usually comes with a project. Computer programming in C/C++ is required for the implementation. Prerequisite: IE 525.

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