Financial Mathematics and Investment (P01817)

? Credit Points : 10 ? SCQF Level : 11 ? Acronym : MAT-P-FMI

The need to produce models in Finance that are as close to reality as possible has required the use of advanced mathematics and stochastic analysis. This course explores the basic theory of Financial Mathematics and considers important applications in finance and investment. The following topics are covered.

Introduction to financial derivatives, futures and forwards, options, option strategies.

Revision of probability, expectation, variance, covariance
and correlation, binomial and normal distribution, central limit theorem.

Time value of money, compound interest and discounting, equation of value.

Duration, convexity and immunisation of a portfolio.

Compound interest functions including annuities certain.

General loan schedule, comparison of investment projects.

Binomial trees and basic option pricing techniques in discrete time, limit of the Cox-Ross-Rubinstein model.

Brief introduction to Brownian Motion and Ito's formula,
Black-Scholes option pricing formula and its properties.

Different types of security (equities, debentures, index-linked stocks), stocks issued by governments, public bodies and limited companies. The term to maturity, perpetuities, prices and yields allowing for the possibility of default. Taxation. Needs of different investors, particularly pension funds.

Entry Requirements

? Pre-requisites : PGs Only

Subject Areas

Home subject area

Operational Research, (School of Mathematics, Schedule P)

Delivery Information

? Normal year taken : Postgraduate

? Delivery Period : Semester 2 (Blocks 3-4)

? Contact Teaching Time : 2 hour(s) per week for 10 weeks

? Other Required Attendance : 1 hour(s) per week for 4 weeks

All of the following classes

Type	Day	Start	End	Area
Lecture	Tuesday	10:00	10:50	KB
Lecture	Friday	10:00	10:50	KB

Summary of Intended Learning Outcomes

1. Knowledge of basic financial concepts.
2. Ability to apply basic probability theory in financial models.
3. Understanding of issues in actuarial mathematics.
4. Understanding of basic financial derivative instruments.
5. Understanding of option pricing in discrete time.
6. Familiarity with the Black-Scholes formula.
7. Understanding of some practical aspects of equities and bonds.