SDST3910 Financial Economics I (6 credits) Academic Year 2026
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 This course is on option pricing and hedging. The course will concentrate on the theory and idea of derivatives pricing and risk management.
Course Contents & Topics Option market; European and American options; discrete-time option pricing theory; true probabilities vs. risk-neutral probabilities; the Black-Scholes formula; implied volatility; option Greeks; market-making and hedging; exotic options; embedded options (equity-linked insurance); interest rate model.

For the purposes of Institute and Faculty of Actuaries (IFoA) exemptions by accreditation, your score will be based on the Final Exam (70%) and a computer-based assignment (30%).
Course Learning Outcomes
On successful completion of this course, students should be able to:

CLO 1 Calculate option price using binomial tree, include European option, American option, options on currencies, options on futures contracts, and options on bonds
CLO 2 Understanding the risk neutral probability, and how to price option using real probability
CLO 3 Understanding the Black-Scholes formula, include the assumptions, the Greek letters, option elasticity, and implied volatility
CLO 4 Understanding the hedging strategies and portfolio, market-maker’s risk and profit, and self-financing portfolio
CLO 5 Understanding exotic options, include Asian options, barrier options, compound options, gap options, and exchange options
CLO 6 Understanding embedded options and how they are priced (equity-linked insurance)
CLO 7 Understanding interest rate models
Pre-requisites
(and Co-requisites and
Impermissible combinations)		 Pass in SDST2602 or SDST3902; and
Not for students who have passed in FINA2322, or have already enrolled in this course; 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
2026 BSc in Actuarial Science ( Core/Compulsory )
2026 Professional Core in Risk Management ( Disciplinary Elective )
2026 Major in Risk Management ( Disciplinary Elective )
2025 BSc in Actuarial Science ( Core/Compulsory )
2025 Professional Core in Risk Management ( Disciplinary Elective )
2025 Major in Risk Management ( Disciplinary Elective )
Course to PLO Mapping 2026 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2026 Professional Core in Risk Management < PLO 1,2,3,4 >
2026 Major in Risk Management < PLO 1,2,3,4 >
2025 BSc in Actuarial Science < PLO 1,2,3,4,5 >
2025 Professional Core in Risk Management < PLO 1,2,3,4 >
2025 Major in Risk Management < PLO 1,2,3,4 >
Offer in 2026 - 2027 Y        1st sem    Examination Dec     
Offer in 2027 - 2028 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 N
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, a computer-based assessment and a class test) 25.0 1,2,3,4,5,6,7
Examination One 3-hour written examination 75.0 1,2,3,4,5,6,7
Required/recommended reading
and online materials		 1. Derivatives Markets, Chapters 12-14, 2nd edition or later edition, by Robert L. McDonald.
2. Actuarial Mathematics for Life Contingent Risks, Chapters 15 and 17, 3rd edition by David C. M. Dickson, Mary R. Hardy and Howard R. Waters.
3. Options, Futures and Other Derivatives, 4th or later edition, by J. Hull.
Course Website http://moodle.hku.hk
Additional Course Information NIL