Financial Mathematics
FM
5012: Mathematical
Background for Finance
Spring 2008
- Textbook: Numerical Methods in
Finance and Economics, P. Brandimarte.
- Reading
material:
- The Mathematics of
Financial Derivatives: A Student Introduction, P.
Willmot, S. Howison and J. Dewynne.
- Numerical
Analysis: An Introduction, W.
Gautschi.
- Difference Methods
for Initial-Value Problems, R.D. Richtmyer and K.W. Morton.
- Syllabus:
- Basic
concepts in numerical analysis
- Consistency, stability and converge
- Real numbers, machine numbers and rounding
- The effect of rounding errors
- Solving
linear systems of equations
- Vector and matrix norms
- Condition number of a matrix
- Direct methods
- Classical iterative methods
- The method of steepest descent
- The method of conjugate gradients
- The method of generalized residuals
- Finite
difference methods for European Options
- The terminal, boundary-value problem
- The relation with the heat and transport equations
- An explicit method for the heat equation
- An implicity methods for the hear equation
- The Crank-Nicolson method for the heat equation
- The upwinding method for the transport equation
- Finite
difference methods for American options
- The terminal, boundary-value problem
- The obstacle problem
- A finite difference method for the obstacle problem
- The projected SOR method
- A finite difference method for American options
- Some lecture notes:
- Newton's
method
----> click here
- Classic iterative methods
----> click here
- Minimization Algorithms
----> click here
- GMRES
methods
----> click here
- Finite difference methods for European
options ---->
click here
- Finite difference methods for American
options ---->
click here
- Grade:
Average of the N-1
best grades of the N homeworks
- Homeworks:
- Homework #1 (Newton's method)
----> click here
(With a solution of the first four questions.)
- Homework #2 (Iterative methods for Ax=b)
----> click here
(With a solution.)
- Homework #3 (Finite differences, heat
equation)
---->
click here
- Homework #4 (Finite differences, European call options)
----> click here
- Homework #5 (Finite differences, the obstacle
problem) ----> click
here
- Homework #6 (Finite differences, American options)
----> click here