SDST3911 Financial economics II (6 credits) Academic Year 2025
Offering Department SCDS (Department of Statistics and Actuarial Science) Quota ---
Course Co-ordinator Prof W Li, SCDS (Department of Statistics and Actuarial Science) < wylsaas@hku.hk >
Teachers Involved (Prof W Li,Statistics & Actuarial Science)
Course Objectives Stochastic calculus has become an essential tool in economics, insurance, finance, and econometrics nowadays. It serves as the foundation for pricing financial derivatives, including options and futures. In this course, students shall study basic stochastic calculus theory and its applications in financial economics.  They will be skillful in using Ito calculus and know its applications in asset pricing and interest rate models. In addition, students will work in groups to prepare and present hot financial topics. They will practice their presentation skills in public speaking and report writing.
Course Contents & Topics Brownian motion; introduction to stochastic calculus; arithmetic and geometric Brownian motion; Ito formula; Sharpe ratio and risk premium; Black-Scholes equation; risk-neutral stock-price process and option pricing; option's elasticity and volatility; Vasicek, Cox-Ingersoll-Ross, and Black-Derman-Toy models; delta-hedging for bonds and the Sharpe-ratio equality constraint; Black's model; options on zero-coupon bonds; interest-rate caps and caplets.
Course Learning Outcomes
On successful completion of this course, students should be able to:

CLO 1 understanding measure theory based probability theory
CLO 2 understanding conditional probability and martingales
CLO 3 understand Brownian motion and Ito calculus
CLO 4 understanding Black-Scholes option pricing theory
CLO 5 understanding interest rate models, such as Vasicek and Cox-Ingersoll-Ross models
CLO 6 be logical to deliver his/her own analysis through a written report
CLO 7 be confident to express his/her own analytic and strategic ideas through a slide presentation
Pre-requisites
(and Co-requisites and
Impermissible combinations)		 Pass in MATH3603 or SDST3603 or SDST3903 or SDST3910; and
Not for students who have passed in MATH3906, or have already enrolled in this course.
Only for students admitted in 2025 and thereafter.
Course Status with Related Major/Minor /Professional Core 2U000C00 Course not offered under any Major/Minor/Professional core
2024 BSc in Actuarial Science ( Disciplinary Elective )
2024 Major in Risk Management ( Disciplinary Elective )
2024 Minor in Actuarial Studies ( Disciplinary Elective )
2023 BSc in Actuarial Science ( Disciplinary Elective )
2023 Major in Risk Management ( Disciplinary Elective )
2023 Minor in Actuarial Studies ( Disciplinary Elective )
2022 BSc in Actuarial Science ( Disciplinary Elective )
2022 Major in Risk Management ( Disciplinary Elective )
2022 Minor in Actuarial Studies ( Disciplinary Elective )
2021 BSc in Actuarial Science ( Disciplinary Elective )
2021 Major in Risk Management ( Disciplinary Elective )
2021 Minor in Actuarial Studies ( Disciplinary Elective )
Course to PLO Mapping 2024 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2024 Major in Risk Management < PLO 2,3,4 >
2023 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2023 Major in Risk Management < PLO 2,3,4 >
2022 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2022 Major in Risk Management < PLO 2,3,4 >
2021 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2021 Major in Risk Management < PLO 2,3,4 >
Offer in 2025 - 2026 Y        2nd sem    Examination May     
Offer in 2026 - 2027 Y
Course Grade A+ to F
Grade Descriptors
A Demonstrate thorough mastery at an advanced level of extensive knowledge and skills required for attaining all the course learning outcomes. Show strong analytical and critical abilities and logical thinking, with evidence of original thought, and ability to apply knowledge to a wide range of complex, familiar and unfamiliar situations. Apply highly effective organizational and presentational skills.
B Demonstrate substantial command of a broad range of knowledge and skills required for attaining at least most of the course learning outcomes. Show evidence of analytical and critical abilities and logical thinking, and ability to apply knowledge to familiar and some unfamiliar situations. Apply effective organizational and presentational skills.
C Demonstrate general but incomplete command of knowledge and skills required for attaining most of the course learning outcomes. Show evidence of some analytical and critical abilities and logical thinking, and ability to apply knowledge to most familiar situations. Apply moderately effective organizational and presentational skills.
D Demonstrate partial but limited command of knowledge and skills required for attaining some of the course learning outcomes. Show evidence of some coherent and logical thinking, but with limited analytical and critical abilities. Show limited ability to apply knowledge to solve problems. Apply limited or barely effective organizational and presentational skills.
Fail Demonstrate little or no evidence of command of knowledge and skills required for attaining the course learning outcomes. Lack of analytical and critical abilities, logical and coherent thinking. Show very little or no ability to apply knowledge to solve problems. Organization and presentational skills are minimally effective or ineffective.
Communication-intensive Course Y
Course Type Lecture-based course
Course Teaching
& Learning Activities
Activities Details No. of Hours
Lectures 36.0
Tutorials 12.0
Reading / Self study 100.0
Assessment Methods
and Weighting
Methods Details Weighting in final
course grade (%)		 Assessment Methods
to CLO Mapping
Assignments Coursework (assignments, tutorials, and a class test) 20.0 1,2,3,4,5
Examination One 3-hour written examination 40.0 1,2,3,4,5
Presentation A group slide presentation (a series of presentation workshops will be provided) 20.0 7
Project reports A group-written report (a series of scientific writing workshops will be provided) 20.0 6
Required/recommended reading
and online materials		 Robert L. McDonald: Derivatives Markets (2nd edition), Chapters 20, 21 and 24.
John Hull: Options, Futures and Other Derivatives (2008, 7th edition)
Alison Etheridge: A Course in Financial Calculus (2002)
Steven Shreve: Stochastic Calculus for Finance II Continuous-Time Models (2008)
Course Website http://moodle.hku.hk
Additional Course Information NIL