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21-370 Discrete-Time Finance Fall: 9 units This course introduces the Black-Scholes option pricing formula, shows how the binomial model provides a discretization of this formula, and uses this connection to fit the binomial model to data. It then sets the stage for Continuous-Time Finance by discussing in the binomial model the mathematical technology of filtrations, martingales, Markov processes and risk-neutral measures. Additional topics are American options, expected utility maximization, the Fundamental Theorems of Asset Pricing in a multi-period setting, and term structure modeling, including the Heath-Jarrow-Morton model. 3 hours lecture. The pre-requisite for 21-370 is 21-270, and either 21-256 or 21-259, and the co-requisite is 70-207, 21-325, 36-225, or 36-217. Students in 21-370 are expected to read and write proofs. Discrete-Time Finance is a prerequisite for 21-420 Continuous-Time Finance. Note that 70-207 Probability and Statistics for Business Applications is an adequate probability co-requisite for this course but is not an adequate pre-requisite for 21-420 Continuous-Time Finance which requires one of the calculus based probability courses 21-325, 36-225 or 36-217. |