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Mathematical Finance (POW) : Kenneth K. Mwangi
Mathematical Finance (POW) : Kenneth K. Mwangi
Kenneth K. Mwangi
Table of contents
1 A Brief History of Mathematical Finance
Before the 1900
2 Mathematics Used in Mathematical Finance
Math in MF continued
3 Application of Financial Mathematics
Hedging and Risk Management
Algorithmic Trading
Asset Liability Modelling
Portfolio Optimization
4 Research Areas in Mathematical Finance
5 Current Issues
Open Problems in Mathematical Finance
6 Conclusion
Kenneth K. Mwangi Mathematical Finance (POW)
A Brief History of Mathematical Finance
Mathematics Used in Mathematical Finance
Application of Financial Mathematics
Before the 1900
Research Areas in Mathematical Finance
Current Issues
Conclusion
Kolmogorov/Levy/Doeblin/Ito
1637: tulip bulb crash: put option sellers cannot meet their buying
obligations. This leads to a bad reputation of options in continental
Europe.
Math in MF
Math in MF continued
These financial institutions have to make sure they price these derivatives
correctly and manage them effectively.
Algorithmic Trading
If market prices are martingales, then one can neither gain nor lose on
average from non-anticipating trading strategies.
Finance academics used to believe that markets are too efficient in order
to systematically profit from predictable market movements. The rise in
CPU power lead many academics to abandon that view and start hedge
funds to exploit anomalies.
Pension plans have long term fixed liabilities whose magnitude is based on
actuarial estimates of retirement age, future salaries, mortality rates, etc.
Portfolio Optimization
Main Concern:
How do we minimize the trading cost associated with portfolio
management;
How do we design a trading system;
1 Pricing of Derivatives
4 Portfolio Optimization
Current Issues
Conclusion
As Casey Stengel once said: In theory, theory and practice are the same.
But in practice, they are very different.
References
Robert Jarrow and Philip Protter A Short History of Stochastic Integration and
Mathematical Finance; The early years, 1880 to 1970.
COX, J.C., INGERSOLL, J.E. and ROSS, S.A. (1985). A Theory of the Term
Structure of Interest Rates.