# Unit information: Financial Mathematics in 2016/17

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Unit name Financial Mathematics MATH35400 20 H/6 Teaching Block 2 (weeks 13 - 24) Professor. Nick Whiteley Not open MATH11300 Probability 1, MATH 11400 Statistics 1 and MATH21400 Applied Probability 2. None School of Mathematics Faculty of Science

## Description

Unit aims

This unit provides an introduction to the mathematical ideas underlying modern financial mathematics. The aim of the course is to understand the pricing of financial derivatives and apply these ideas to a variety of option contracts. In particular, the course will give a derivation of the Black-Scholes option pricing formula.

General Description of the Unit

In 1973 Black and Scholes solved the problem of pricing a basic financial derivative (a product based on an underlying asset), the European call option. They assumed that the market had no arbitrage, and hence determined a unique fair price of the option. This course develops the sophisticated mathematics required by the subsequent explosion of trade in increasingly complex derivatives.

We first analyse a very simple model with just two time points where trading is possible. All basic ideas are already explained in this setting, including the notion of a risk-neutral probability measure. The theory is then extended to general discrete models with an arbitrary number of periods using martingales. In the second half of the course we model asset prices in continuous time by exponential Brownian motion, and informally introduce stochastic calculus. The final part of the course will consider the pricing of derivatives and the Black-Scholes formula.

Relation to Other Units

The units Financial Mathematics and Queuing Networks apply probabilistic methods to problems arising in various fields. This course develops and applies rigorous mathematical techniques, and requires a good understanding of probability theory.

## Intended learning outcomes

Learning Objectives

At the end of the course the student should be able to

• describe the difference between common financial instruments
• express financial problems in a mathematical framework
• calculate prices of simple financial instruments
• do calculations with martingales and Brownian motion.

Transferable Skills

Ability to compute prices of basic financial instruments Mathematical modelling skills Problem solving

## Teaching details

Lectures, supported by examples sheets.

## Assessment Details

100% Examination

Raw scores on the examinations will be determined according to the marking scheme written on the examination paper. The marking scheme, indicating the maximum score per question, is a guide to the relative weighting of the questions. Raw scores are moderated as described in the Undergraduate Handbook.