**
MATH 294: MATHEMATICS OF FINANCE (WINTER 2007)
**

** Professor: **
Professor R. J. Williams

** Class Time: ** MWF, 2-2.50 p.m.

** Class Meeting Place: ** AP&M 7421

** Professor Office Hours: ** Monday 3-3.45 pm; Friday 1-1.50 pm; and by appointment; AP&M 6121.

** Teaching Assistant: ** Nam Lee

** TA Office Hour: ** Wed 4-5 p.m., AP&M 6444.

**
DESCRIPTION: **
This course is an introduction to the mathematics of financial models.
The aim is to provide students with an introduction to some basic
models of finance and the associated mathematical machinery.

** OUTLINE: **
The course will begin with the development of the basic ideas of hedging and
pricing by arbitrage
in the discrete time setting of binomial tree models.
Key probabilistic concepts of conditional
expectation, martingale, change of measure, and representation,
will all be introduced first in this
simple framework as a bridge to the continuous model setting.
Mathematical fundamentals for the development and analysis of continous time
models will be covered, including Brownian motion, stochastic calculus, change
of measure, martingale representation theorem. These will then be combined
to develop the Black-Scholes option pricing formula.
Pricing and hedging for European and American call
options will be discussed.
As time allows, additional topics will be discussed, possibly
including models of the interest rate market.

** TEXT: ** Introduction to the Mathematics of Finance, R. J. Williams,
AMS, 2006.

** PREREQUISITES: ** A course in probability or consent of instructor.
A possible probability course is Math 280AB (Graduate Probability).
However, other probability courses may be used in place of this with the
consent of the instructor. Some knowledge of conditional
expectation and martingales is an asset.
For background reading, students may wish to look at
the books below by Billingsley or Chung.
The course
Math 286 (Stochastic Differential Equations) is a very useful
complement to Math 294 and students may find it helpful to take Math 286
before or after Math 294.

** HOMEWORK: Click here for homework. **

** REFERENCES: **

* Background in Probability and Stochastic Calculus: *

Probability and Measure, P. Billingsley, Wiley.
A Course in Probability Theory, K. L. Chung, revised second edition, Academic Press.
Probability: Theory and Examples, R. Durrett, Third edition, Duxbury Press.
Introduction to Stochastic Integration, K. L. Chung and R. J. Williams,
Birkhauser, Boston, Second Edition, 1990.
Continuous Martingales and Brownian Motion, D. Revuz and M. Yor,
Springer, Third Edition, 1999.

* Background in Economics/Finance:*
Investment Science, David G. Luenberger, Oxford University Press, 1998.
Financial Economics, H. H. Panjer (ed.),
The
Actuarial Foundation, Schaumburg, Illinois, 1998.
Options, Futures and other Derivative Securities, J. Hull, Prentice Hall, Fifth Edition.

* Mathematics of Finance: Stochastic Approaches *
An Elementary Introduction to Mathematical Finance, S. M. Ross,
Second Edition, Cambridge, 2003.
The Mathematics of Finance: Modeling and Hedging, J. Stampfli
and V. Goodman, Brooks/Cole, 2001.
Introduction to Mathematical Finance: Discrete Time Models, S. Pliska,
Blackwell, 1999.
Stochastic Finance -- an Introduction in
Discrete Time, H. Follmer and A. Schied, de Gruyter, 2002.
Economics and Mathematics of Financial Markets, J. Cvitanic and
F. Zapatero, MIT Press, 2004.
Stochastic Calculus for Finance: Vol I and II, S. Shreve, Springer, 2004.
Financial calculus, Martin Baxter and Andrew Rennie, Cambridge University Press,
1996.
A Course in Financial Calculus, A. Etheridge, Cambridge University Press,
2002.
Introduction to Stochastic Calculus Applied
to Finance, D. Lamberton and B. Lapeyre,
Chapman and Hall, 1996.
Arbitrage Theory in Continuous Time, T. Bjork, Oxford University
Press, 1998.
An Introduction to the Mathematics of Financial Derivatives,
Salih N. Neftci, Academic Press, 1996.
Stochastic Calculus and Financial Applications, J. M. Steele, Springer, 2001.
Risk-Neutral Valuation, N. H. Bingham and R. Kiesel, Springer, 1998.
Financial Markets in Continuous Time, R.-A. Dana and
M. Jeanblanc, Springer, 2003.
Martingale methods in financial modeling, M. Musiela and M. Rutkowski, Second edition, Springer, 2005 (currently out of print).
Mathematics of Financial Markets, R. J. Elliott and P. E. Kopp,
Springer, 2004.
Essentials of Stochastic Finance, A. N. Shiryaev, World Scientific,
1999.

* Mathematics of Finance: PDE Approach *
The Mathematics of Financial Derivatives: A student introduction, Paul Wilmott, et al., Cambridge
University Press, 1995.

* Numerical Methods in Finance *
Numerical methods in finance, L. C. G. Rogers and D. Talay, Cambridge
University Press, 1997.
Monte Carlo methods in financial engineering, P. Glasserman, Springer, 2004
.
Tools for Computational Finance, R. Seydel, Springer, 2004.

* Mathematics of Finance: more advanced stochastic
theory *
Methods of mathematical finance, I. Karatzas
and S. Shreve, Springer, 1998.
Financial Derivatives in Theory and Practice, P. J. Hunt and J. E. Kennedy
, Wiley, 2000.
Derivatives in Financial Markets with Stochastic Volatility,
J.-P. Fouque, G. Papanicolaou, and K. R. Sircar, Cambridge University Press, 2000.
Interest Rate Models -- Theory and Practice, D. Brigo and F. Mercurio,
Springer, 2001.
Credit Risk: Modeling, Valuation and Hedging, Bielecki and Rutkowski, Springer, 2002.
** LINKS TO RELATED WEB SITES**

Please direct any questions to
Professor Ruth J. Williams, email:
williams at math dot ucsd dot edu

Last updated June 15, 2007.