Undergraduate Course: Financial Mathematics (MATH10003)
|School||School of Mathematics
||College||College of Science and Engineering
|Credit level (Normal year taken)||SCQF Level 10 (Year 3 Undergraduate)
||Availability||Available to all students
|Summary||"Optional course for Honours Degrees involving Mathematics and/or Statistics; stipulated course for Honours in Economics and Statistics.
This course is a basic introduction to finance. It starts by making an introduction to the value of money, interest rates and financial contracts, in particular, what are fair prices for contracts and why no-one uses fair prices in real life. Then, there is a review of probability theory followed by an introduction to financial markets in discrete time. In discrete time, one will see how the ideas of fair pricing apply to price contracts commonly found in stock exchanges. The next block focuses on continuous time finance and contains an introduction to the basic ideas of Stochastic calculus. The last chapter is an overview of Actuarial Finance. This course is a great introduction to finance theory and its purpose is to give students a broad perspective on the topic."
(A) Introduction to financial markets and financial contracts; value of money; basic investment strategies and fundamental concepts of no-arbitrage.
(B) Basic revision of probability theory (random variables, expectation, variance, covariance, correlation; Binomial distribution, normal distribution; Central limit theorem and transformation of distributions).
(C) The binomial tree market model; valuation of contracts (European and American); No-arbitrage pricing theory via risk neutral probabilities and via portfolio strategies.
(D) Introduction to stochastic analysis: Brownian motion, Ito integral, Ito Formula, stochastic differential equations; Black-Scholes model and Option pricing within Black-Scholes model. Black-Scholes PDE
(E) Time value of money, compound interest rates and present value of future payments. Interest income. The equation of value. Annuities. The general loan schedule. Net present values. Comparison of investment projects.
Information for Visiting Students
|Pre-requisites||Visiting students are advised to check that they have studied the material covered in the syllabus of each prerequisite course before enrolling.
|High Demand Course?
Course Delivery Information
|Academic year 2019/20, Available to all students (SV1)
|Learning and Teaching activities (Further Info)
Lecture Hours 22,
Seminar/Tutorial Hours 6,
Summative Assessment Hours 2,
Programme Level Learning and Teaching Hours 2,
Directed Learning and Independent Learning Hours
|Assessment (Further Info)
|Additional Information (Assessment)
||Coursework 5%, Examination 95%
||Hours & Minutes
|Main Exam Diet S1 (December)||2:00|
On completion of this course, the student will be able to:
- Demonstrate knowledge of basic financial concepts and financial derivative instruments.
- Fundamentally understand the no-Arbitrage pricing concept.
- Apply basic probability theory to option pricing in discrete time in the context of simple financial models.
- Demonstrate fundamental knowledge of stochastic analysis (Ito Formula and Ito Integration) and the Black-Scholes formula.
- Understand the introduction to actuarial mathematics.
|Björk, Tomas. Arbitrage theory in continuous time. 3rd Edition, Oxford Uni-|
versity Press 2009
Hull, John C. Options, Futures and Other Derivatives. Elsevier/Butterworth
Shreve, Steven E.. Stochastic calculus for finance. I. Springer-Verlags 2004
Shreve, Steven E.. Stochastic calculus for finance. II. Springer-Verlag 2004
|Course organiser||Dr Chak Hei Lo
Tel: (0131 6)50 5387
|Course secretary||Miss Sarah McDonald
Tel: (0131 6)50 5043