Title MATH 60082 Computational Finance
Credit Rating 15
Level PG
Semester 2
Course Coordinator(s) Professor Peter Duck (School of Mathematics)
Methods of Delivery The course will be continually assessed via a series of mini-
projects. The project material will cover a range of topics
including the solution of nonlinear ODE's, SDEs, lattice (tree)
methods, to the solution of the nonlinear partial differential
equations, and will require students to write a series of computer
programs to solve a specified problem.
Lecture Hours 36
Seminar Hours --
Private Study Hours 96
Total Study Hours 132
Pre-requisites Students unfamiliar with C++ will be required to attend extra
lectures during the first weeks of term.
Co-requisites --
Dependant Courses --
Assessment Methods and Relative The students will be required to submit written reports on the
Weightings projects to be handed in on set deadlines and the reports will be
marked. There will be no written examination for this course.
Dates for submission, length and weighting of reports will be
confirmed at the beginning of the term.
Aims
The unit aims to introduce students to scientific computing (specifically computational finance) by means
of a variety of numerical techniques, through the use of high-level computing languages. Students will
use a combination of writing their own codes, together with the use of scientific libraries (such as NAG).
To familiarise students with modern numerical approaches and techniques (and capabilities).
Learning Outcomes
Students should be able to (i) translate mathematical problems (well defined systems of mathematical
equations) into computational tasks (ii) to assess the accuracy of any numerical approximations, through
numerical experimentation (and, when possible, by comparison with analytic solution) (iii) to process
numerical results into a comprehensible form (including the use of standard graphical plotting
packages), for presentation in a report, (iv) to be able to give a critical assessment of the integrity of
numerical methods and results.
Syllabus
• Introduction to numerical computation. Numerical approximation and different methodologies.
Discussion of errors, roundoff, truncation, discretisation.
• Introduction to numerical solution of ODE's using multi-step methods. Implicit/explicit schemes.
Euler and Runge-Kutta methods. Newton linearisation. Solution using library routines. Treatment
of initial and boundary value problems.
• Monte Carlo simulations; generation of random numbers (including use of antithetic variables).
Pricing of European/Vanilla call/put options. Simple path-dependency options (but NO early
exercise examples). Assessment of advantages and disadvantages of simulation approach.
• Binomial tree valuation of European/Vanilla call/put options. Assessment (and improvement) of
accuracy. Application to early-exercise put options.
• Introduction to solution of PDE's using finite-difference methods. Discussion of stability,
consistency and convergence. Brief introduction to error analysis. Methods for parabolic
equations. CFL condition. Discussion of methods of solution including iterative methods: Jacobi,
Gauss-Seidel, SOR, Line relaxation and PSOR methods. Solution of European call/put options
using Crank-Nicolson method. Solution of early exercise put options (using PSOR).
• Advanced techniques: quadrature methods, body-fitted (free-boundary) coordinate systems.
Reading List
• G.D. Smith, `Numerical Solution of Partial Differential Equations', Clarendon Press, Oxford,
1978.
• P. Wilmott, S. Howison & J. Dewynne, `The mathematics of financial derivatives', Cambridge
1995.
• J.C. Hull, `Options, Futures, and Other Derivatives', Sixth Edition, Prentice Hall 2005.
• D.J. Higham, `An introduction to financial option valuation', Cambridge 2004.
