OPTION B
　　• Models for Quantifying Risk, 2005, by Cunningham, R., Herzog, T. and London, R.L., Chapters 5-6, 9-13, Chapter 15, Sections 15.1-15.4, 15.6-15.7

　　Note: It is anticipated that candidates will have done the relevant exercises in the texts.
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　　Study Notes  - Life Contingencies Segment

　　SNs for the Preliminary Education examinations are available on the SOA Web site under Exams and Jobs/Candidate and Exam Information/Spring Exam Session/Spring 2007 Basic Education Catalog ?C Study Notes Information.  Hard copies may be purchased by using the Study Note and Published Reference order form in the back of the printed catalog or by downloading the form from the Spring Exam Session Web page.

　　Code   Title
　　MLC-11-07# Exam MLC Introductory Study Note
　　MLC-09-06 Exam MLC Sample Questions and Solutions
　　MLC-24-05 Multi-State Transition Models with Actuarial Applications
　　MLC-25-05 Section 8.5 from the second printing of Actuarial Mathematics, Second Edition (to be used with text option A only)

　　LEARNING OUTCOMES ?C FINANCIAL ECONOMICS SEGMENT

　　A. Interest rate models

　　1. Evaluate features of the Vasicek and Cox-Ingersoll-Ross bond price models.
　　2. Explain why the time-zero yield curve in the Vasicek and Cox-Ingersoll-Ross bond price models cannot be exogenously prescribed.
　　3. Construct a Black-Derman-Toy binomial model matching a given time-zero yield curve and a set of volatilities.

　　B. Rational valuation of derivative securities

　　1. Use put-call parity to determine the relationship between prices of European put and call options and to identify arbitrage opportunities.
　　2. Calculate the value of European and American options using the binomial model.
　　3. Calculate the value of European and American options using the Black-Scholes option-pricing model.
　　4. Calculate and interpret the option Greeks.
　　5. Explain the cash flow characteristics of the following exotic options: Asian, barrier, compound, gap, and exchange.
　　6. Explain what it means to say that stock prices follow a diffusion process.
　　7. Apply Itô’s lemma in the one-dimensional case.
　　8. Apply option pricing concepts to actuarial problems such as equity-linked insurance.

　　C. Risk management techniques

　　1. Explain and demonstrate how to control risk using the method of delta-hedging.

　　Note: Concepts, principles and techniques needed for Exam M are covered in the reference listed below.  Candidates and professional educators may use other references, but candidates should be very familiar with the notation and terminology used in the listed references.
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