Course syllabus

The main topic of the course "Financial derivatves and PDE's" is the theoretical valuation of financial derivatives based on the arbitrage-free principle and using methods from stochastic calculus and partial differential equations.

This page contains the program of the course: lectures, exercise sessions and computer labs. Other information, such as learning outcomes, teachers, literature and examination, are in a separate course PM.

Teacher and student representatives

Teacher and examiner: Moritz Schauer (smoritz@chalmers.se)

Student representatives

Literature

Basic financial concepts (PDF ). Read this by yourself during the first week.

Stochastic Calculus, Financial Derivatives and PDE's. (PDF

Errata: pdf

Steven E. Shreve. Stochastic Calculus for Finance II. Continuous-Time Models (Springer).

Program

The schedule of the course is in TimeEdit.

The week plan is preliminary and might be changed during the course.

Lectures

Week Day Time and place Sections Slides
3

16/01 8:00 - 9:45 Euler Introduction. Probability spaces, random variables, distribution functions (Ch 1, 2) TMA285_MMA711_230117.pdf
17/01 10:00-11:45 Pascal Lebesgue integral, expectation. Change of measure. TMA285_MMA711_230118.pdf
18/01 13:15-15:00 Euler  Conditional expectation. Stochastic processes. Brownian motion, quadratic variation (Ch 2, 3) TMA285_MMA711_230119.pdf
19/01 10:00-11:45 Vasa B, Vasa 2-3

Brownian motion. Martingales. Markov processes (Ch 3)

TMA285_MMA711_230120.pdf
4

23/01 8:00 - 9:45 Euler

Itô's integral (Ch 4)

TMA285_MMA711_230124.pdf
24/01 10:00-11:45 Pascal

Itô's formula. Diffusion processes(Sec 4.6)

25/01 13:15-15:00 Euler

Diffusion processes. Girsanov's Theorem (Sec 4.5)

26/01 10:00-11:45 Vasa B, Vasa 2-3

Exercises 2.8, 2.15, 3.3, 3.27, 4.4, 4.5, 4.6

5 30/01 8:00 - 9:45 Euler

Stochastic differential equations

Kolmogorov PDE (Sec 5.2)

TMA285_MMA711_230131

31/01 10:00-11:45 Pascal

Kolmogorov PDE, Markov property, and transition density (Sec 5.2)

Exercise 3.33, 5.7

TMA285_MMA711_230201.pdf
1/02 13:15-15:00 Euler

Arbitrage-free markets (Sec 6.1)

Risk-neutral formula in discrete case

2/02  10:00-11:45 Vasa B, Vasa 2-3

cancelled

6 6/02  8:00-9:45 Euler

Risk-neutral pricing formula for European derivatives (Sec 6.2)

7/02 10-11.45 Pascal

Black-Scholes price of standard European derivatives (Sec 6.3)

8/02  13:15-15:00 Euler

Black-Scholes price of standard European derivatives (Sec 6.3)

No notes because I followed Sec 6.3
9/02 10:00-11:45 Vasa B, Vasa 2-3

The Asian option. (Sec 6.4). Finite difference solutions of PDE's (Sec 5.4)

7 13/02 8:00-9:45 Euler

Finite difference for heat equation.

Crude Monte Carlo method.

Control variate Monte Carlo method (Sec 6.4)

Compendium page 134-137

14/02 10:00-11:45 Pascal

Local volatility models. CEV model (Sec 6.6)

15/02 13.15-15 Euler

Local volatility models (Sec 6.6)

16/02 10:00-11:45 Vasa B, Vasa 2-3

Stochastic volatility models.

8 20/02 8:00-9:45 Euler

Work on projects

21/02 10:00-11:45 Pascal

Work on projects

22/02

13:15-15:00 Euler

Work on projects

23/02 10:00-11:45 Vasa B, Vasa 2-3

Variance swaps (Sec 6.6)

See compendium, Sec 6.6

9 27/02 8:00-9:45 Euler

Yield curve. Classical approach to ZCB pricing.

28/02 10:00-11:45 Pascal Classical approach to ZCB pricing. HJM model (Sec 6.7).
29/02

13:15-15:00 Euler

Interest rate swaps (Sec 6.7) (Sec 6.8)
1/03 10:00-11:45 Vasa B, Vasa 2-3 Forwards (Sec 6.8) TMA285_MMA711_forwards.pdf
10 5/03 10:00-11:45 Pascal

Futures (Sec 6.8).

6/03

13:15-15:00 Euler

Repetition/questions

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Examination

This course will be examined through a series of assignments and a written exam.

The minimum number of points to pass the course is 15p, of which 12p come from the written exam and 3p from the assignments.

- at GU a result greater than or equal to 24 points is graded VG;
- at Chalmers a result greater than or equal to 23 points and smaller than 25 points is graded 4 and a result greater than or equal to 25 points is graded 5.

Note that the written exam gives at most 20 points, and so is not sufficient to get VG or 5.

Assignments:

1) There are 10 exercises in Chapters 1 through 5 of the lecture notes which are marked with the symbol (☆).  Awarded points: Max. 5 points. Deadline for submission: February 12th, h. 23.59. You can submit a picture of handwritten solutions, but be sure that they are clearly readable. This assignment has to be worked out individually and submitted via canvas. This assignment is not compulsory.

2) The two projects in appendix A of the lecture notes on the Asian option and the CEV model. You can use either Python (preferable) or Matlab for the computer part. Awarded points: Max. 5 points for each project. Deadline for submission: March 6th, h. 23.59. This assignment can be worked out on groups of up to 3 students.  If you are looking for teammates to create a group post a message in the discussion thread. The assignments should be submitted via canvas. This assignment is not compulsory.

Together with the projects, you have to submit a statement, signed by all members of the group, certifying that this report is your own work and that all members of the group have equally contributed to the assignment. All reports will be subjected to a plagiarism check. Information on how to avoid plagiarism and on Chalmers policy on plagiarism can be found here

3) Written exam in MARCH. Awarded points: Max. 20 points. The written exam is compulsory and no aids are allowed. The exam will include practical exercises as well as theoretical questions. The list of definitions and theorems:

Definitions: 2.17, 4.4, 4.5, 6.1, 6.2, 6.3, 6.5, 6.6, 6.9, 6.11

Theorems: 6.1, 6.2, 6.3, 6.5, 6.6, 6.9, 6.11, 6.13, 6.15, 6.17, 6.18, 6.19, 6.20, 6.25, 6.27, 6.28

Some old exams can be found here:

Exam March 2022

Re-exam June 2022

Re-exam Aug 2022

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Date Details Due