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CMP-3AS5 - FURTHER ACTUARIAL TOPICS

Module Code:
CMP-3AS5
Department:
Computing Sciences
Credit Value:
10
Level:
3
The use of stochastic techniques for modelling share prices, derivatives and interest rates are becoming increasingly important tools for the actuary. This module introduces stochastic models for valuing options and guarantees inherent in some insurance contracts. It considers the properties of different models of asset returns and how these are used to value options and guarantees. It also expands on the application of Statistics within General Insurance with particular reference to Ruin Theory and Credibility Theory. This module is restricted to Actuarial Science students only and is not available to students outside this course.

Copies of the lecture notes will be made available on the day of the lecture via Blackboard.


Course texts:

Required Purchases

  • Hull J.C., Options, futures and other derivatives, Prentice Hall, ISBN 9780136015764
  • Klugman, Panjer and Willmot, Loss Models, from Data to Decisions,Wiley Interscience ISBN9780471215776

Possible Additional Purchases

  • Baxter M., Rennie A., Financial calculus. An introduction to derivative pricing, CUP, ISBN 9780521552899
  • Elton E.J., Gruber M.J., Brown S.J., Goetzmann W.N., Modern Portfolio Theory and Investment Analysis, Wiley, ISBN 9780470505847

Submission:

Written coursework should be submitted by following the standard CMP practice. Students are advised to refer to the Guidelines and Hints on Written Work in CMP.

Deadlines:

If coursework is handed in after the deadline day or an agreed extension:
 

 

Work submitted Marks deducted
After 15:00 on the due date and before 15:00 on the day following the due date 10 marks
After 15:00 on the second day after the due date and before 15:00 on the third day after the due date 20 marks
After 15:00 on the third day after the due date and before 15:00 on the 20th day after the due date.  All the marks the work merits if submitted on time (ie no marks awarded) 
After 20 working days Work will not be marked and a mark of zero will be entered


Saturdays and Sundays will NOT be taken into account for the purposes of calculation of marks deducted.

All extension requests will be managed through the LTS Hub. A request for an extension to a deadline for the submission of work for assessment should be submitted by the student to the appropriate Learning and Teaching Service Hub, prior to the deadline, on a University Extension Request Form accompanied by appropriate evidence. Extension requests will be considered by the appropriate Learning and Teaching Service Manager in those instances where (a) acceptable extenuating circumstances exist and (b) the request is submitted before the deadline. All other cases will be considered by a Coursework Coordinator in CMP.

For more details, including how to apply for an extension due to extenuating circumstances download Submission for Work Assessment (PDF, 39KB)
 

Plagiarism:

Plagiarism is the copying or close paraphrasing of published or unpublished work, including    the work of another student; without due acknowledgement. Plagiarism is regarded a serious offence by the University, and all cases will be investigated. Possible consequences of plagiarism include deduction of marks and disciplinary action, as detailed by UEA's Policy on Plagiarism and Collusion.


Module speicific:

  • To introduce students to simple stochastic interest rate models.
  • To understand asset pricing models and their main assumptions and limitations.
  • To understand stochastic models of the behaviour of security prices.
  • To apply the binomial tree method and Black-Scholes option pricing formula for valuing options.
  • To extend knowledge of ruin theory to develop models to calculate probability of ruin.
  • To understand the empirical Bayes approach to credibility theory and how it differs from Bayesian methods.

Transferable Skills:

  • Written communication.
  • Problem solving.
  • The ability to critically evaluate modern financial theories.
  • Knowledge of models of asset returns and their use in valuing financial instruments.

On completion of this module students should be able to:
 

  • Understand simple stochastic models for investment returns.
  • Use arbitrage theory to price derivatives.
  • Understand the concepts of Brownian motion as the basis of construction of stochastic models of the behaviour of security prices.
  • Apply techniques for pricing vanilla call and put options, which can be used for valuing exotic options and options embedded in insurance products.
  • Be able to apply Statistical knowledge to generate a range of models suitable for use in General Insurance.

Topics will be introduced during lectures with coursework distributed for discussion at subsequent lectures. Students will be required to supplement the lectures and coursework with reading and numerical examples in between lectures.

Total hours: 18

Lectures: 9 (with provisional weekly schedule)

  1. Stochastic models for investment returns
  2. No-arbitrage pricing
  3. Binomial model for option prices.
  4. Brownian motion and Ito's formula and application to security prices.
  5. Black-Scholes differential equation and option pricing formula.
  6. Poisson processes and Compound Poisson Processes
  7. Ruin in finite/infinite and continuous/discrete time
  8. Credibilty theory
  9. Other Statistical methods used in General Insurance Note that asset pricing models and the efficient market hypothesis are covered in NBS 2F2Y.


 


Examination