ACTS 4302 SYLLABUS FALL 2016 - Principles of Actuarial Models - Financial Economics

Sep 27, 2026

Uploaded by Mabel

ACTS 4302 develops knowledge of the theoretical basis of actuarial models and their application to insurance and other financial risks, emphasizing interest rate models, rational valuation of derivative securities, and mathematical/probabilistic risk management foundations. The course includes coverage aligned with CAS exam 3F and SOA exam MFE and applies models to options pricing. It trains students in put-call parity, binomial and Black-Scholes methods, option Greeks, exotic options cash-flow traits, lognormal diffusion and Itô’s lemma, Monte Carlo simulation with variance reduction, and delta-hedging risk control.

LanguageEnglish

CategoryExam

FormatPDF

Pages9

Reading Time23 min

AccessFree to download

Learning Outcomes

Derivative securities valuation

Monte Carlo simulation

Risk management techniques

Material Covered

Put-Call Parity

Comparing Options

Binomial Trees and Risk-Neutral Pricing

Black-Scholes formula and Greeks

Delta hedging and Monte Carlo valuation

Interest rate models

ACTS 4302 SYLLABUS FALL 2016 Principles of Actuarial Models: Financial Economics BRIEF DESCRIPTION: This 3 semester credit hour course develops the student's knowledge of the theoretical basis of certain actuarial models and the application of those models to insurance and other financial risks. The topics discussed include interest rate models, rational valuation of derivative securities, mathematical and probabilistic foundation of risk management. This class covers parts of CAS exam 3F and SOA exam MFE. Prerequisites: STAT 4351 and STAT 4382. Prerequisite or Corequisite: FIN 3390 or instructor consent required. The class meets on T/TH 10:00 am – 11:15 am in room CB1 1.106 REQUIED BACKGROUND: This course assumes a basic knowledge of calculus and an introductory knowledge of probability and finance. INSTRUCTOR: Natalia A. Humphreys Office: FO 2.402E Tel. (972) 883-6597 [E-mail:](E-mail: Natalia.humphreys@utdallas.edu)[ ](E-mail: Natalia.humphreys@utdallas.edu)[Natalia.humphreys@utdallas.edu](E-mail: Natalia.humphreys@utdallas.edu) Webpage: [http://www.utdallas.edu/](http://www.utdallas.edu/)~natalia.humphreys/ Office Hours: T/TH 1:00 pm – 2:00 pm, or by appointment. LEARNING OUTCOMES. At the end of the course students will be able to: A. Understand the rational valuation of derivative securities. Specifically: 1. Use put-call parity to determine the relationship between prices of European put and call options and to identify arbitrage opportunities. 2. Calculate the value of European and American options using the binomial model. 3. Calculate the value of European options using the Black-Scholes option-pricing model. 4. Identify the situations where the values of European and American options are the same. 5. Interpret the option Greeks. 6. Explain the cash flow characteristics of the following exotic options: Asian, barrier, compound, gap, and exchange. 7. Explain the properties of a lognormal distribution and explain the Black-Scholes formula as an expected value for a lognormal distribution. 8. Explain what it means to say that stock prices follow a diffusion process. 9. Apply Itô’s lemma in the one-dimensional case. B. Understand the principles of the Monte Carlo simulation. Specifically: 1. Simulate lognormal stock prices. 2. Use variance reduction techniques to accelerate convergence. C. Understand the principles of risk management techniques. Specifically: 1. Explain and demonstrate how to control risk using the method of delta-hedging. TEXTBOOK (required) : ASM MFE Study manual for Exam MFE/Exam 3F. Financial Economics (Nineth Edition), recent edition, Abraham Weishaus. ADDITIONAL TEXT (not required, but useful – check the library for this resource): Derivatives Markets (Recent Edition), Robert L. McDonald. MATERIAL COVERED: | Topic
Number | Topic Name | | Topic
Number | Topic Name | | --- | --- | --- | --- | --- | | 1 | Put-Call Parity | | 11 | The Black-Scholes formula: applications and volatility | | 2 | Comparing Options | | 12 | Delta hedging | | 3 | Binomial Trees-Stock, One Period | | 13 | Asian, Barrier, and Compound options | | 4 | Binomial Trees-General | | 14 | Gap, Exchange, and Other options | | 5 | Risk-Neutral Pricing | | 15 | Monte Carlo valuation | | 6 | Binomial Trees: Miscellaneous Topics | | 16 | Brownian Motion | | 7 | Modeling stock prices with the lognormal distribution | | 17 | Itô's lemma | | 8 | Fitting stock prices to a lognormal distribution | | 18 | Binomial tree models for interest rates | | 9 | The Black-Scholes formula: Introduction | | 19 | The Black formula for bond options | | 10 | The Black-Scholes formula: Greeks | | 20 | Equilibrium interest rate models: Vasicek and Cox-Ingersoll-Ross | General Note: Unless otherwise states chapter appendices are not included in the required readings from this text USEFUL LINKS: [https://www.soa.org/education/exam-req/edu-exam-mfe-detail.aspx](https://www.soa.org/

FAQs

What topics are covered in ACTS 4302?

The syllabus covers put-call parity, comparing options, binomial tree models, risk-neutral pricing, Black-Scholes formula applications and Greeks, delta hedging, exotic options, Monte Carlo valuation, Brownian motion, Itô’s lemma, and interest rate models including Vasicek and Cox-Ingersoll-Ross.

What learning outcomes should students achieve by the end of the course?

Students learn rational valuation of derivative securities (including European vs. American options, option Greeks, and exotic option cash-flow characteristics), the principles of Monte Carlo simulation with variance reduction, and risk management through methods such as delta-hedging.

How is grading determined and when are the assessments held?

Grades are based on attendance and participation (5%), weekly homework (15%), two midterms (25% each), and a final exam (30%). Midterm I is Thursday, September 22, 2016; Midterm II is Thursday, November 3, 2016; and the final is Thursday, December 15, 2016, with times and location listed in the syllabus.

Sep 27, 2026

Uploaded by Mabel