- UCAS course code
- GG14
- UCAS institution code
- M20
Course unit details:
Mathematical Modelling in Finance
Unit code | MATH39032 |
---|---|
Credit rating | 10 |
Unit level | Level 3 |
Teaching period(s) | Semester 2 |
Available as a free choice unit? | No |
Overview
Pre/co-requisites
Unit title | Unit code | Requirement type | Description |
---|---|---|---|
Mathematics of Waves and Fields | PHYS20171 | Pre-Requisite | Optional |
Introduction to Financial Mathematics | MATH20912 | Pre-Requisite | Compulsory |
Partial Differential Equations & Vector Calculus | MATH24420 | Pre-Requisite | Optional |
Aims
Learning outcomes
On successful completion of the course, students will be able to:
1. Recognise the role that financial derivatives play in reducing risk
2. Derive boundary conditions for financial contracts priced under the Black-Scholes model
3. Construct a PDE to price financial contracts, using the concepts of stochastic calculus and hedging
4. Apply transformations and similarity solution techniques to PDEs such as Black-Scholes equation and derive analytic solutions.5. Use the analytic formulae to evaluate fair prices for European options
6. Extend the basic European option model (to include dividends, stochastic volatility, stochastic interest rates, early exercise and barriers) and where possible solve the resulting models analytically
Syllabus
1. Introduction to options, futures, no arbitrage principle [3]2. Models for stock prices, basics of stochastic calculus and Ito's lemma. [3]3. Deriving the the pricing partial differential equation, and the assumptions behind it. Formulating the mathematical problem. Analytic solutions and Implied volatility. 34. Connection with the heat conduction equation, solution of the heat conduction equation - similarity solutions and the Dirac delta function. Derivation of the price of European options. [3]5. Extension to consider options on assets paying dividends. [2]6. American options and free boundary problems. [2]7. Interest-rate models and bonds. [2]8. Multi Factor models and Barrier options. [3]
Teaching and learning methods
There are 3 or 4 videos released per week, delivering content from the course .Students are expected to watch the videos, fill in the gaps in the notes, as well as reading and reviewing the notes. Each lecture has a formative assessment attached to test the student's understanding of the lecture. A 1 hour review session highlight some of the more important material from the videos and goes through some of the examples sheets together. A 1 hour feedback tutorial provides an opportunity to work on problems in class, answers and partial solutions will be revealed in class. Finally a coursework test provides an opportunity for students to receive feedback on how well they understand the first half of the course. Students can also get feedback on their understanding directly from the lecturer, either using the Piazza forum or by arranging a meeting during the lecturer's office hour.
Assessment methods
Method | Weight |
---|---|
Written exam | 80% |
Set exercise | 20% |
Feedback methods
Feedback tutorials will provide an opportunity for students' work to be discussed and provide feedback on their understanding. Coursework or in-class tests (where applicable) also provide an opportunity for students to receive feedback. Students can also get feedback on their understanding directly from the lecturer, for example during the lecturer's office hour.
Recommended reading
Wilmott, O., Howison, S., Dewynne, J., The Mathematics of Financial Derivatives, Cambridge University Press 1995. ISBN 0521497892
Wilmott, P., 2001: Paul Wilmott Introduces Quantitative Finance, 2nd Edition, Wiley. ISBN: 0471498629. Wilmott, P., 2000: Paul Wilmott on Quantitative Finance, Wiley. ISBN: 0471874388
Study hours
Scheduled activity hours | |
---|---|
Lectures | 12 |
Tutorials | 12 |
Independent study hours | |
---|---|
Independent study | 76 |
Teaching staff
Staff member | Role |
---|---|
Paul Johnson | Unit coordinator |