MTH4251 Financial mathematics
Faculty of Science
MTH4251 Financial mathematics is a level 4, 6-credit-point, undergraduate and postgraduate unit from the Faculty of Science, offered in 2027 in Semester 1 and Semester 2 at Clayton. It has no prerequisites and unlocks 4 units.
- Credit points
- 6
- Offered in 2027
- Semester 1, Semester 2
- Clayton
- Assessment
- Exam 50%
- and 1 other task
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Requisites
Before MTH4251
No prerequisites or corequisites besides the enrolment rules below.
After MTH4251
4 units list MTH4251 as a prerequisite or corequisite.
Enrolment rules
You must be enrolled in the Graduate Certificate in Mathematics or the Master of Mathematics
Prohibition: ETC3510, ETC5351, MTH3251
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 2027
| Teaching period | Campus | Mode |
|---|---|---|
| First semester | Clayton | On campus |
| Second semester | Clayton | On campus |
Assessment
- Continuous assessmentDemonstration50%
- Final assessment - Exam (3 hours and 10 minutes)Examination50%
Assessment details may change. Please refer to the assessment information in Moodle closer to the start of the teaching period.
Learning outcomes
When you finish this unit, you should be able to:
- 1
Analyse discrete-time models in finance by applying random walks, martingales, conditional expectation, and stopping times, and using these to study applications such as insurance and ruin probabilities;
- 2
Interpret and model continuous-time processes including Brownian motion and diffusions, and use stochastic calculus tools such as Ito’s formula and stochastic differential equations to solve problems in financial mathematics;
- 3
Apply measure-change and asset-pricing frameworks by using the Equivalent Martingale Measure, implementing the Binomial, multi-period models, and the Black–Scholes models, and applying the fundamental theorems of asset pricing to problems of pricing and hedging;
- 4
Communicate mathematical reasoning and results effectively through clear oral and written explanations, and collaborate in small groups to solve problems in financial mathematics;
- 5
Extend and deepen understanding of financial mathematics through advanced model synthesis, rigorous analysis, and independent application to complex or novel problems, demonstrating higher levels of rigour and autonomy.
Workload and teaching
- Applied sessions22 hours
- Seminars36 hours
- Teaching approachActive learning
Three 1-hour seminars;
One 2-hour applied class (in weeks 2-12) and
7 hours of independent study per week.
Active learning will occur in lectures and applied classes.
Contacts
- Unit Coordinators
- Dr Ivan Guo
- Chief Examiners
- Dr Ivan Guo
Common questions
What are the prerequisites for MTH4251?
MTH4251 has no prerequisites, but enrolment rules apply.
What can I take after MTH4251?
MTH4251 is a prerequisite or corequisite for 4 units, including MTH5210, MTH5510, MTH5520 and MTH5530.
When is MTH4251 offered?
In 2027, MTH4251 runs in Semester 1 and Semester 2 at Clayton.
Does MTH4251 have an exam?
Yes. The exam is worth 50% of the final mark, alongside 1 other task.