MTH3251 Financial mathematics
Faculty of Science
MTH3251 Financial mathematics is a level 3, 6-credit-point, undergraduate unit from the Faculty of Science, offered in 2022 in Semester 1 and Semester 2 at Clayton. It has no prerequisites and unlocks 4 units.
- Credit points
- 6
- Offered in 2022
- Semester 1, Semester 2
- Clayton
- Assessment
- Exam 60%
- and 2 other tasks
This is the 2022 handbook entry. See the 2027 entry.
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Requisites
Before MTH3251
No prerequisites or corequisites besides the enrolment rules below.
After MTH3251
4 units list MTH3251 as a prerequisite or corequisite.
Overview
You will use the concept of random variables and their uses as models of uncertain future payoffs. An important concept for analysis is the conditional expectation. Special attention is given to normal distribution and multivariate normal distribution, in which explicit calculations are possible. Systems evolving in time encorporating uncertainty are modelled as stochastic (random) processes. Examples of such in discrete time are Random Walk and Martingales. As an application we look at the Risk model in insurance and obtain the bound on Ruin probability. Models in continuous time are based on Brownian motion. Stochastic analysis uses the novel concepts of Ito integral and Ito's formula. Applications in finance include the Black-Scholes model and the Ornstein-Uhlenbeck process. Simple stochastic differential equations are introduced. Another application to interest rates is Vasicek's stochastic differential equation. A new mathematical technique Change of probability measure is introduced. Girsanov theorem gives the change of measure for Brownian motion and related processes. To manage financial risks the Fundamental theorems of Asset pricing are stated and applied to various models, such as the . Binomial and Black-Scholes models. Important concepts of arbitrage, replicating portfolios are used for pricing and hedging options and other financial contracts.
Offerings in 2022
| Teaching period | Campus | Mode |
|---|---|---|
| First semester | Clayton | On campus |
| Second semester | Clayton | On campus |
Assessment
- In-semester assessmentThreshold hurdle40%
- In-semester assessment40%
- Examination (3 hours and 10 minutes)Threshold hurdle60%
Learning outcomes
When you finish this unit, you should be able to:
- 1
Learn the modern approach to evaluation of uncertain future payoffs;
- 2
Describe the concept of arbitrage and its relevance to financial contracts;
- 3
Demonstrate understanding of conditional expectation, martingales and stopping times;
- 4
Interpret models of random processes such as random walk, Brownian motion and diffusion, and stochastic differential equations;
- 5
Use Ito’s formula and basic stochastic calculus to solve some stochastic differential equations;
- 6
Apply the change of probability measure technique and use the Equivalent Martingale Measure for pricing of financial derivatives;
- 7
Apply the fundamental theorems of asset pricing to the Binomial and Black-Scholes models. Pricing and Hedging;
- 8
Formulate discrete time Risk Model in Insurance and use the Optional Stopping Theorem to control probabilities of ruin.
Workload and teaching
- Applied sessions16.5 hours
- Lectures36 hours
- Teaching approachActive learning
- Three 1-hour lectures;
- One 1.5-hour applied class (in weeks 2-12);
- Nine hours of independent study (in week 1) and
- Seven and a half hours of independent study (in weeks 2-12)
Active learning will occur in lectures and applied classes.
Where it fits
MTH3251 is part of 8 areas of study in the 2022 handbook.
- APPLMTH07Additional extended major elective unitApplied mathematicsNo reviews yet
- FININMAT04Level 2 and 3 core unitsFinancial and insurance mathematicsNo reviews yet
- MTHFNDEC01Elective unitsMathematical foundations of econometricsNo reviews yet
- MTHSTAT05Level 3 unitsMathematical statisticsNo reviews yet
- MTHSTAT07Level 2 and 3 unitsMathematical statisticsNo reviews yet
- MATHS09Mathematics elective unitsMathematicsNo reviews yet
- MATHS11Mathematics elective unitsMathematicsNo reviews yet
- MATPURE11Pure mathematics elective unitsPure mathematicsNo reviews yet
Contacts
- Unit Coordinators
- Professor Fima Klebaner
- Dr Ivan Guo
- Chief Examiners
- Professor Fima Klebaner
Common questions
What are the prerequisites for MTH3251?
MTH3251 has no prerequisites, but enrolment rules apply.
What can I take after MTH3251?
MTH3251 is a prerequisite or corequisite for 4 units, including BEX5460, MTH5210, MTH5510 and MTH5520.
When is MTH3251 offered?
In 2022, MTH3251 runs in Semester 1 and Semester 2 at Clayton.
Does MTH3251 have an exam?
Yes. The exam is worth 60% of the final mark, alongside 2 other tasks.
Which majors and minors include MTH3251?
MTH3251 is part of Applied mathematics; Financial and insurance mathematics; Mathematical foundations of econometrics; Mathematical statistics; and Mathematics, and 1 other area of study.