COMPUTATIONAL FINANCE

Code: MA473 | L-T-P-C: 3-0-2-8

Prerequisites: MA373 or equivalent

Review of financial market models for derivative pricing, interest rate modelling and Black-Scholes PDE; Solutions of pricing PDEs using finite difference methods, American option as free boundary problem, computation of price of American options, pricing of exotic options, upwind scheme and other methods; Monte-Carlo simulation, generating sample paths, discretization of SDE, Monte-Carlo for option valuation and Greeks, Monte-Carlo for American and exotic options; Variance reduction techniques; Monte-Carlo implementation of short rate models, forward rate models and LIBOR market model, volatility structure and calibration.

Texts:

1. R. U. Seydel, Tools for Computational Finance, 5th Ed., Springer, 2012.
2. P. Glasserman, Monte Carlo Methods in Financial Engineering, Springer, 2004.

References:

1. Y.-l. Zhu, X. Wu, I-L. Chern and Z.-z. Sun, Derivative Securities and Difference Methods, 2nd Ed., Springer, 2013.
2. D. Higham, Introduction to Financial Option Valuation: Mathematics, Stochastics and Computation, Cambridge University Press, 2004.
3. P. Wilmott, S. Howison and J. Dewynne, The Mathematics of Financial Derivatives: A Student Introduction, Cambridge University Press, 1997.
4. Y. Lyuu, Financial Engineering and Computation, Cambridge University Press, 2002.