Module Information

Module Identifier
Module Title
Stochastic Models in Finance
Academic Year
Semester 2
Other Staff

Course Delivery

Delivery Type Delivery length / details
Lecture 18 x 1 hour
Seminars / Tutorials 4 x 1 hour
Other Worksheets 4 x 5 hours
Other Private Study 56 hours


Assessment Type Assessment length / details Proportion
Semester Exam 2 Hours   CONVENTIONAL EXAMINATION  100%
Supplementary Exam 2 Hours   CONVENTIONAL EXAMINATION  100%

Learning Outcomes

On successful completion of this module students should be able to:

Set up mathematical models for modeling random systems over time (stochastic process modeling).

Use the formalism of Ito's stochastic calculus to manipulate and solve stochastic differential equations.

Apply probability and stochastic process theory to model financial models

Analyse and synthesise mathematical models of financial marks.


The module builds on probability and stochastic processes to introduce continuous time stochastic processes aimed at modelling the stock exchange. We aim to derive the Black-Scholes model of arbitrage option pricing.


Arbitrage Pricing
Cox-Ross-Rubenstein Model
Binomial branch/tree models
Binomial Representation theorem
Continuous Processes
The Wiener Process
Ito calculus
Girsanov's theorem
Black-Scholes Model
The Black-Scholes model
Further Topics
Poisson Processes

Module Skills

Skills Type Skills details
Application of Number throughout the module.
Communication Students will be expected to submit written worksheet solutions.
Improving own Learning and Performance Feedback via tutorials
Information Technology Indicative use of computational modeling stochastic processes.
Personal Development and Career planning Students will be exposed to an area of application that they have not previously encountered.
Problem solving All situations considered are problem-based to a greater or lesser degree.
Research skills Students will be encouraged to consult various books and journals for examples of application.
Subject Specific Skills using probabilistic and stochastic techniques in financial modeling.
Team work N/A


This module is at CQFW Level 6