MA543 Actuarial Finance II

Course Catalog Description


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.


Associate Teaching Professor Email Office
Yi Li Kidde 225

Campus Fall Spring Summer
On-Campus X

More Information

Course Outcomes

    • Students will understand mathematics and statistics of portfolios and perform mean-variance 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


  • Derivative Market (3rd edition) by McDonald, R. L. Pearson Education
  • Corporate Finance (4th edition) by Berk, J. and DeMarzo, P., Pearson.


Grading Policies

1 Homework 30%
2 Mid-term 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 Fixed-income 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.