The Pricing of Securities in Financial Markets

The details
Essex Business School
Colchester Campus
Undergraduate: Level 6
Monday 13 January 2020
Friday 20 March 2020
24 September 2019


Requisites for this module
BE311 and BE313



Key module for

BSC N300 Finance,
BSC N301 Finance (Including Foundation Year),
BSC N302 Finance (Including Year Abroad),
BSC N304 Finance (Including Placement Year),
BSC GN13 Finance and Mathematics,
BSC GN15 Finance and Mathematics (Including Placement Year),
BSC GN18 Finance and Mathematics (Including Foundation Year),
BSC GN1H Finance and Mathematics (Including Year Abroad),
BSC N3T1 Finance with Mandarin

Module description

This module revolves around the theoretical foundations of some widely used pricing models for securities traded in financial markets i.e. equities, options and bonds. For equities, models such as the Gordon growth model, the Classical CAPM, and the APT are frequently used by applied researchers and practitioners. Similarly, the Black-Scholes formula, along with the CRR (Cox-Ross-Rubinstein) binomial model, are often utilized to price options in the market. While such applied works take the end product (the model) for granted as a "black box", this module is aimed at explaining the theoretical foundations of these models from a unified viewpoint to enable students to appreciate the usefulness and/or the weakness of these models.
The module is designed for third-year finance students. It may appeal to accounting and management students with a technical bent, to similarly inclined economics students with an interest in financial economics, and to mathematics students interested in financial markets.

Module aims

The aim of the module is to provide a rigorous treatment of asset pricing literature including CAPM, and the fundamental theorem of asset pricing and its applications in pricing contingent claims.

Module learning outcomes

On successful completion of the module, students will be able to understand:
- the economic concepts associated with the fundamental theorem of asset pricing and to appreciate its usefulness to finance
- the mathematics associated with the mean-variance analysis and portfolio choices by rational investors
- the mechanism of different types of derivatives and to price them, and to be able to establish the relationship between the price of primary securities and those of derivative securities

Module information

Skills for Your Professional Life (Transferable Skills)

Critical Thinking: By studying the theoretical foundations of pricing models students will be able to understand the assumptions used by these models and critically analyse them. This will allow students to appreciate the usefulness and/or the weaknesses of these models, and to understand why sometimes they work/fail in practice. This type of knowledge is particularly useful in areas such as investment banking and asset management.

Learning and teaching methods

Class exercises will be announced in advance, and in principle, students may be appointed on site to work on the questions on the whiteboard in the classes. Hence, students are expected to work on all exercises in advance. The primary focus of the module is on the development of problem-solving skills. Students are encouraged to work on the problems discussed in the lectures – otherwise it may be difficult for them to understand the general principles of asset pricing (simply memorising the end results does not provide an understanding of the general principles from which those results are derived). By working on concrete problems students are more likely to be able to understand the general principles. Class exercises will be announced in advance and, in principle, students may be appointed on site to work on the questions on the whiteboard in the classes. Hence, students are expected to work on all exercises in advance.


  • Cuthbertson, Keith; Nitzsche, Dirk. (2004) Quantitative financial economics: stocks, bonds and foreign exchange, Chichester, N.J.: Wiley.
  • Fabozzi, Frank J.; Neave, Edwin H.; Zhou, Guofu. (c2012) Financial economics, Hoboken, NJ: Wiley.
  • Peleg, Doron. (2014) Fundamental models in financial theory, Cambridge, Massachusetts: The MIT Press.
  • Hull, John. (2014) Fundamentals of futures and options markets, Harlow: Pearson.

The above list is indicative of the essential reading for the course. The library makes provision for all reading list items, with digital provision where possible, and these resources are shared between students. Further reading can be obtained from this module's reading list.

Assessment items, weightings and deadlines

Coursework / exam Description Deadline Weighting
Coursework IN CLASS TEST
Exam 120 minutes during Summer (Main Period) (Main)

Overall assessment

Coursework Exam
30% 70%


Coursework Exam
0% 100%
Module supervisor and teaching staff
Dr Luiz Vitiello and Dr Stefano Filomeni



External examiner

Dr Apostolos Kourtis
The University of East Anglia
Senior Lecturer in Finance
Available via Moodle
Of 51 hours, 49 (96.1%) hours available to students:
2 hours not recorded due to service coverage or fault;
0 hours not recorded due to opt-out by lecturer(s).


Further information
Essex Business School

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