MAT-61956 Financial Mathematics and Statistics, 5 cr

Additional information

Suitable for postgraduate studies.

Person responsible

Juho Kanniainen

Lessons

Implementation Period Person responsible Requirements
MAT-61956 2019-01 2 - 3 Juho Kanniainen
Exam and project work

Learning Outcomes

A solid understanding of the mathematical basis of financial derivative pricing models is essential for understanding phenomena and pricing and hedging options in banks and financial institutions. Mathematically and statistically, the main focus areas are i) stochastic calculus for asset price modeling and derivative pricing and ii) model estimation. Financially, the main focus is on the pricing of equity and FX derivatives, but also interest rate derivatives are briefly covered. After completing this course, the student - Understands the no-arbitrage principle in option pricing - Understands the main mathematical concepts in continuous-time finance, including Ito¿s lemma, martingale processes, Radon-Nikodym derivative, and Girsanov's theorem - Is familiar with continuous and discrete-time models and methods to price and hedge and options and other derivatives on equities, indexes, and currencies - Is familiar with LIBOR market model for interest rate derivatives - Is familiar with stochastic volatility models - Understands advanced Monte-Carlo methods with variance reduction techniques and can apply them - Can implement derivative pricing models with stochastic volatility in Matlab or in some other environment - Can calibrate option pricing models with stochastic volatility using option market data - Can estimate the GARCH volatility models with maximum likelihood estimation methods and time-series data - Understands the main results of recent scientific papers on the field

Content

Content Core content Complementary knowledge Specialist knowledge
1. Arbitrage pricing     
2. Derivative contracts in financial markets     
3. Pricing with tree models     
4. Stochastic processes for asset price modelling in continuous time     
5. Ito calculus     
6. Martingale approach to arbitrage theory     
7. Girsanov¿s theorem     
8. Derivative pricing and hedging in continuous time     
9. LIBOR market model     
10. Stochastic volatility in continuous time     
11. GARCH models for stochastic volatility     
12. Maximum likelihood estimation     

Instructions for students on how to achieve the learning outcomes

The grade of the course is based on the final exam and project work.

Assessment scale:

Numerical evaluation scale (0-5)

Partial passing:

Completion parts must belong to the same implementation

Study material

Type Name Author ISBN URL Additional information Examination material
Book   The Concept and Practice of Mathematical Finance   Mark Joshi   978-0521823555       No   

Prerequisites

Course Mandatory/Advisable Description
MAT-01500 Insinöörimatematiikka X 5 Mandatory   1
MAT-01510 Insinöörimatematiikka A 5 Mandatory   1
MAT-01520 Insinöörimatematiikka B 5 Mandatory   1
MAT-01530 Insinöörimatematiikka C 5 Mandatory   1
MAT-01560 Matematiikka 5 Mandatory   1
MAT-01566 Mathematics 5 Mandatory   1
MAT-02500 Todennäköisyyslaskenta Mandatory   1
MAT-02506 Probability Calculus Mandatory   1

1 . Alternative prerequisite.

Additional information about prerequisites
As a prerequisite, only one of the following courses in mandatory: MAT-01500, MAT-01510, MAT-01520, MAT-01530, MAT-01560, MAT-01566, MAT-02500, or MAT-02506. Also, it can be replaced by another corresponding course on probability calculus and statistics provided at other campuses. Moreover, basic skills in programming/scientific computing is highly recommended.



Correspondence of content

Course Corresponds course  Description 
MAT-61956 Financial Mathematics and Statistics, 5 cr TTA-45046 Financial Engineering, 3 cr  

Updated by: Kunnari Jaana, 05.03.2019