MA543 Actuarial Finance II
Course Catalog Description
Introduction
This course is an introduction to the investment and financial market with applications of mathematics to pricing and hedging options, efficient market hypothesis, evaluation of the investment risk and stock analysis, capital structures, and derivative instruments in risk management
Prerequisites: MA 542
Course Objective
• Students will learn about mean variance portfolio theory and results.
• Students will be introduced to various models of assets portfolios and explain their assumption and appropriate applications.
• Students will understand the concept of efficient markets, and methods to avoid irrational errors and market inefficiencies.
• Students will understand different methods to measure and analyze investment risk, and techniques for capital budgeting.
• Students will understand the components of capital structures.
• Students will understand derivative instruments, and their applications to risk management.
• Students will understand options with applications to assets in risk management.
• Students will understand different pricing models with applications to options and assets.
• Students will understand the importance of risk management in hedged asset portfolios.
Instructors
Associate Teaching Professor  Office  

Yi Li

yli6@stevens.edu  Kidde 225 
Campus  Fall  Spring  Summer 

OnCampus  X 
More Information
Course Outcomes

• Students will understand mathematics and statistics of portfolios and perform meanvariance analysis.
• Students will understand three forms of efficient market hypothesis, and identify empirical evidence for or against each of the hypothesis.
• Students will be able to discuss the advantage and disadvantage of different measures of investment risk and conduct risk analysis.
• Students will understand different methods to raise capital and describe the effect of capital structures on companies.
• Students will understand main derivative instruments and will be able to calculate transaction costs affecting profit, as well as describing forward and prepaid forward contracts.
• Students will be able to explain the characteristics of options in risk management and calculate payoffs and profit using option strategies.
• Students will understand approaches to evaluate derivative securities, hedging options and stocks using pricing models, and will be able to calculate probability, percentiles means and variance of stock prices.
• Students will be able to calculate and explain option Greeks and apply options and derivatives to risk management.
Course Resources
Textbook

Derivative Market (3rd edition) by McDonald, R. L. Pearson Education

Corporate Finance (4th edition) by Berk, J. and DeMarzo, P., Pearson.
Grading
Grading Policies
Weights  
1  Homework  30% 
2  Midterm  30% 
3  Final  25% 
4  Project  15% 
Maximum Possible  100% 
Lecture Outline
Topic  Homework  

Week 1  Interest rate measurement  Evaluate the interest of different cash flows. 
Week 2  Equations of value and yield rates  Evaluate yield interest rate. 
Week 3  Valuation of annuities and conversion periods  Measure annuities. 
Week 4  Loan repayment  Evaluate loan repayment 
Week 5  Bond and securities valuation  Evaluate bonds and other securities 
Week 6  Stocks and financial markets  Evaluate stocks price. 
Week 7  Measure the rate of return and net present value  Calculate investment return. 
Week 8  The term structure of interest rates and derivatives  Evaluate forward and spot interest rate. 
Week 9  Interest rate sensitivity  Measure interest rate sensitivity. 
Week 10  Cash flow duration and immunization  Calculate cash flow duration and immunization. 
Week 11  Fixedincome investment  Calculate fixed income investment. 
Week 12  Equity investment and financial derivatives  Measure equity investments. 
Week 13  Definition and formulation of options  Calculate some advanced financial measures. 
Week 14  More advanced financial analysis  Evaluate the interest of different cash flows. 