311500 Foundations of Modern Financial Economics (Finance 1a) (V) (WiSe 2013/2014)

The lecture course Finance 1 is the first in a three-semester sequence on mathematical finance. Finance 1 is meant to equip students with a basic understanding of how derivatives markets work and what the most fundamental techniques for pricing and hedging derivatives are.

The first half of the lecture course (Finance 1a) studies arbitrage arguments, the pricing of forwards and futures as well as option pricing and hedging in discrete-time (one-period and binomial multi-period) stochastic market models. The second half (Finance 1b) introduces continuous-time models, using a rigorous, yet elementary approach to stochastic calculus (based on a demonstrably consistent use of infinitesimals, much in the spirit of financial engineering textbooks). Within this framework, the basics of stochastic calculus as well as the Samelson-Black-Scholes model are treated.

Subsequent lecture courses in this module (viz. Finance 2-3) will be devoted to the economic theory of financial markets and more advanced continuous-time models, developed within classical stochastic analysis.

Requirements for participation, required level

Basic microeconomics and probability

Bibliography

J.C. Hull: Options, futures, and other derivatives. Prentice-Hall, Upper Saddle River, NJ, 6 edition, 2006.

H. Föllmer, A. Schied, Stochastic finance. Springer, Berlin, 2004.

S.F. LeRoy, J. Werner: Principles of financial economics. Cambridge University Press, Cambridge, UK, 2001.

F.S. Herzberg: Lecture notes on Finance 1. Center for Mathematical Economics, Bielefeld University, Bielefeld, 2013.