NMAK16015U  Optimal Stopping with Applications

Volume 2018/2019
Education

MSc Programme in Actuarial Mathematics

Content

The theory of optimal stopping is concerned with the problem of choosing a time to take a particular action. Some applications are:

  • The valuation/pricing of financial products/contracts  where the holder has the right to exercise the contract at any time before the date of expiration is equivalent  to solving optimal stopping problems. Examples:
    1. American options in finance
    2. Surrender options in life insurance
    3. Prepayment of mortage loans
  • In financial engineering, where the problem is to determine an optimal time to sell an asset. Examples
    1. Optimal prediction problem, to sell the asset when the price is, or close to, the ultimate maximum.
    2. Mean-variance stopping problem, to sell the asset so as to maximise the return and to minimise the risk. 

 

The content of the course.

Optimal stopping:

  • Definitions
  • General theory
  • Methods of solutions

 

Areas of applications:

  • Pricing financial products with exercise feature in mathematical finance or life insurance
  • Financial engineering

 

Learning Outcome

Knowledge:

Optimal stopping theory and applications to finance or life insurance

 

Skills:

At the end of the course, the students are expected to be able to

  • Apply general theory of optimal stopping
  • Apply methods for solutions of examples of optimal stopping
  • Pricing American option 

 

Competences:

To make the student operational and to give the student knowledge in applications of optimal stopping in finance or life insurance

 

Book and articles

4 hours of lectures per week for 7 weeks
Identical to NMAK16015U Optimal Stopping with Applications.
Credit
7,5 ECTS
Type of assessment
Oral examination
30-minute oral exam without time for preparation
Aid

The student may bring notes to the oral exam, but they are only allowed to consult these in the first minute after they have drawn a question. After that, all notes must be put away. 

Marking scale
7-point grading scale
Censorship form
No external censorship
Several internal examiners.
Re-exam

As the ordinary exam. 

Criteria for exam assesment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.

  • Category
  • Hours
  • Lectures
  • 28
  • Preparation
  • 177
  • Exam
  • 1
  • Total
  • 206