Financial Mathematics 1

Module code: MA7071

This module together with Financial Mathematics 2 will develop probabilistic tools to enable investors to value financial derivatives. Since there are no strict prerequisites on previous knowledge in probability and stochastics, the module contains mathematical preliminaries (probability space, random variables, distributions, independence, conditional expectation, random processes, simple random walks, Markovian property, martingales, stopping times).

Stochastics will be taught together with financial models, and the last part of this module starts building the background needed for continuous financial models considered mainly in Financial Mathematics 2. A transition from the binomial model of financial market to a continuous one, Wiener process and its properties, and Stochastic differential equations and geometric Brownian motion will be examined.

Topics covered

• Markets
• Forwards/futures
• Call and put European options
• Portfolios
• Hedging
• Arbitrage
• Drift
• Volatility
• Discrete Black-Scholes formula
• American options