Lahore University of Management Sciences

Finn 222 – Introduction to Mathematics of Finance

Fall 2022 (In person)

Instructor Ferhana Ahmad

Room No. 314 – SDSB building
Office Hours Monday Wednesday 11am-12noon
Email ferhana.ahmad@lums.edu.pk, ferhanaahmad@gmail.com
Telephone 042 3560 8044
Secretary/TA Sharha Mumtaz/
TA Office Hours TBA
Course URL (if any)

Course Teaching Methodology (Please mention following details in plain text)

 Teaching Methodology: The teaching methodology will be in person. In case of unfortunate events
(COVID or otherwise), some classes can be conducted through zoom/Microsoft teams, or a recording may
be uploaded for a particular session. The zoom or recorded sessions will be shared through lms.
 Lecture details: Around 10-20% sessions may be recorded.

COURSE BASICS
Credit Hours 3
Lecture(s) Nbr of Lec(s) Per 2 Duration 1.25 hours
Week
Recitation/Lab (per Nbr of Lec(s) Per Duration
week) Week
Tutorial (per week) Nbr of Lec(s) Per Duration
Week

COURSE DISTRIBUTION
Core No
Elective Yes
Open for Student Open for all
Category
Close for Student None
Category

COURSE DESCRIPTION

With the recent developments in Finance over the past decade, the usefulness of Mathematical tools in
Finance has become significant than ever. The course provides an introduction to mathematics of finance
and is ideal for developing an understanding and knowledge of basic mathematical finance that a student
requires throughout his or her academic and professional career. It introduces the vocabulary of
mathematics of finance that helps developing the understanding of financial instrument at large. The course
serves as the basis for higher studies in finance, quantitative finance, computational finance, financial
 Lahore University of Management Sciences
engineering, financial economics, economics, insurance, actuarial sciences or any similar field. The course
will broaden your horizon of finance and financial industry. Not only that the course is essential for the
undergraduate and graduate studies in finance but also plays an important role in the student’s performance
in their professional careers.

The course covers topics including basics of calculus, time value of money, theory of interest, probability,
normal random variables and probability, arbitrage theorem, random walks and Brownian motion.

COURSE PREREQUISITE(S)

 Principles of Finance
Calculus I

COURSE LEARNING OBJECTIVES

The course helps students to get over their fear of mathematics as a student enrolled in SDSB.
The course will

 develop the vocabulary of mathematics of finance

 familiarize students with basic mathematical tools that are used in finance
 introduce students to probability theory required in finance
 introduce students with the concepts of randomness in finance
 prepare students to take advanced courses in finance and quantitative finance

LEARNING OUTCOMES
Upon completion of the course, students will be able to;

 apply basic mathematical concepts used in finance

 implement the learnt theory of interest rates in other courses and in their professional
lives
 apply the randomness concepts in finance and probability
 model randomness using Brownian motion
 simulate a simple random walk
 simulate stock prices as random processes

UNDERGRADUATE PROGRAM LEARNING GOALS & OBJECTIVES

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General Learning Goals & Objectives
Goal 1 –Effective Written and Oral Communication
Objective: Students will demonstrate effective writing and oral communication skills
Goal 2 –Ethical Understanding and Reasoning
Objective: Students will demonstrate that they are able to identify and address ethical issues
in an organizational context.
Goal 3 – Analytical Thinking and Problem Solving Skills
Objective: Students will demonstrate that they are able to identify key problems and generate
viable solutions.
Goal 4 – Application of Information Technology
Objective: Students will demonstrate that they are able to use current technologies in business
and management context.
Goal 5 – Teamwork in Diverse and Multicultural Environments
Objective: Students will demonstrate that they are able to work effectively in diverse
environments.
Goal 6 – Understanding Organizational Ecosystems
Objective: Students will demonstrate that they have an understanding of Economic, Political,
Regulatory, Legal, Technological, and Social environment of organizations.

Major Specific Learning Goals & Objectives

Goal 7 (a) – Discipline Specific Knowledge and Understanding
Objective: Students will demonstrate knowledge of key business disciplines and how they
interact including application to real world situations (Including subject knowledge).
Goal 7 (b) – Understanding the “science” behind the decision-making process (for MGS
Majors)
Objective: Students will demonstrate ability to analyze a business problem, design and apply
appropriate decision-support tools, interpret results and make meaningful recommendations to
support the decision-maker

Indicate below how the course learning objectives specifically relate to any program learning goals and
objectives.

PROGRAM LEARNING COURSE LEARNING COURSE ASSESSMENT ITEM

GOALS AND OBJECTIVES
Goal 1 –Effective Written and Oral
Communication
Goal 2 –Ethical Understanding and
Reasoning
Goal 3 – Analytical Thinking and
Problem Solving Skills
OBJECTIVES
The course provides an opportunity Written: Assignments, Quizzes
to students to write and deliver Oral: CP
effectively the mathematical nature
problems arising in Finance.
The course equips students with Assignments, Quizzes, Exams
basic problem solving techniques
in Finance using quantitative
methods. It enables students to
 Lahore University of Management Sciences
Goal 4 – Application of
Information Technology
Goal 5 – Teamwork in Diverse and
Multicultural Environments
Goal 6 – Understanding
Organizational Ecosystems
Goal 7 (a) – Discipline Specific
Knowledge and Understanding
Goal 7 (b) – Understanding the
“science” behind the decision-
making process
analytically think a problem and
solve it using the problem solving
techniques they're learning
throughout the course
Students will simulate stock prices Class work and Assignments
using Excel
The course forces students to learn Assignments and Projects
in teamwork. The discussion on
assignments and lecture notes will
help them in working in diverse
environments
NA
Students will learn quantitative Quizzes, Assignments, Project,
skills in finance that they can apply and Exams
and model the real world financial
situations/problems
This is a basic course in
mathematics of finance. Students Assignments, Quizzes, and Exams
will learn tools that may help them
in future if they opt for Quantitative
finance career in designing and
solving a problem in finance using
quantitative skills.

Grading Breakup and Policy

Assignment: 10%

Short homework assignments: 5%

Excel assignment (5%):

There will be one individual excel based assignment during the course (in module 4) where students must
simulate a random walk for stock behavior and price different option contracts (as taught in the course).

Quizzes: 20%
There will be around 4-6 announced & unannounced quizzes in class. The N-1 policy will be applicable only
when the number of quizzes exceeds 4. The quizzes can be both announced and unannounced. One quiz will be
dropped to compensate any missed quizzes in case of petitioned (non-petitioned) absences. N-x policy will only
be applicable if there are more than 5 quizzes. No re-take of quizzes will be allowed.
 Lahore University of Management Sciences
Grading Breakup and Policy

Please note that no late submission for project will be entertained. Missed deadlines or missed instruments
mark zero for the instrument even with OSA petition, unless approved by the instructor. Please also note that
there is no make-up quizzes/exams or projects or CP in case of absence (even approved by OSA). There is no
grade for attendance, however being absent from class will reflect in reduced CP and other instrument
grades.

Class Participation: 5%
The students are required to go through chapters and any supporting material that is uploaded before the class
session beforehand and be prepared to participate in the class sessions. The marked CP will be uploaded on
google sheet and students are advised to inform any issues by the weekend following the session for which the
CP is contested.

Midterm Examination: 30%

Final Examination: 35%

The examinations will be closed book/closed notes. No re-take of exams will be allowed. An average grade
that is minimum of student’s average grade in other instruments before midterm exam and the class average
of the midterm would be awarded in case the missed midterm exam is approved by OSA and instructor
beforehand for university competitions or otherwise. There is no compensation/average grade for missed
final exam.

There may be a 5% change in grading breakup during the course.

Class rules:

 You are advised to be on time in sessions. There will be no class participation for students missing,
arriving late or being absent from session for more than 5 minutes.
 Use of mobile phones, bringing food, or creating disturbance in the class will mark you absent for the
session.
 In case of any absences, even approved from OSA, the CP for the session will be marked zero.
 Students are required to keep calculator and basic stationary while attending the sessions for class works
and notes.
 Students are advised not to miss a lecture session for topics taught in the sessions are interlinked and
missing a session means less to no learning in the following sessions (or in the course).
 All of you are expected to participate in the class discussions. To ensure a positive learning climate,
only intelligent and contributory observation and discussions shall be rewarded. (CP)
 All ethical norms shall be observed in the class and examinations.
 Any attempt to disturb a classmate, engage in talking or whispering during the class or to vitiate the
overall class atmosphere may result in negative marks in class participation.
 Please turn off your Cell phones or put them on Silent mode. Use of Smartphone, internet, online
chatting, or use of technology related gadgetry of any kind is not allowed.
 Lahore University of Management Sciences
Grading Breakup and Policy

Policy regarding examinations, quizzes, and other grading instruments

There is a zero-tolerance policy (ZTP) for any undesirable behavior or undeserving attempt to improve your
grades during the quizzes, examinations or afterwards. Such action can result in cancelling your examination
paper. It may also result in disciplinary actions by the Disciplinary Committee. Please carefully weigh in your
action’s costs and benefits and always show an ethical and moral deportment and behavior.

20 minutes of Students
I’ll be keeping 20 minutes at the end of the designated sessions to discuss the concerns, questions, issues
regarding previously covered topics. This will be your time to discuss any issues you are facing with the
content covered since the previous 20 minutes session with students. Three such sessions have been scheduled
throughout the term, i.e., in weeks 5, 8, and 12. Your active participation is highly recommended in these
sessions.

Continue, Start, Stop formative feedback

I’ll be keeping at least two touchpoints for your formulative feedback in the form of Continue, Start, and Stop
format. You can share your feedback on what you’d like me to continue, start or stop in the course. This will
help with a smooth running of the course and improve our learning experience in the course.

Meetings with Instructor

I’ll be keeping 15 minutes meetings with each student to discuss the understanding, progress, and feedback on
the course. The meetings are mandatory and will help us in analyzing your overall experience of the course.
You are advised to meet the instructor at your earliest in the course if you are facing any difficulties in the
course.

EXAMINATION DETAIL

Yes/No: YES
Combine Separate:
Midterm
Duration: 1 hour 15 minutes
Exam
Preferred Date:
Exam Specifications:
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Yes/No: YES
Final Combine Separate:
Exam Duration: 2 hours
Exam Specifications:

     
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COURSE OVERVIEW

The course outlines are subject to change

WEEK/
LECTUR RECOMMENDED
TOPICS SESSION OBJECTIVE(S)
E/ READINGS
MODULE

Basics of Calculus
The module is based on the revision of the basic mathematics and calculus concepts that students have already
learnt in Further mathematics or Calculus I. The module prepares students to look at finance from mathematical
side. The module reviews the real number system, vectors and array, polynomial and series concepts along with
functions, their derivatives and integration.

 Students will revise the

Thomas’ Calculus
(Review)
Ch: 3 (Differentiation)
(3.1, 3.2, 3.5 (chain rule))
1-3 Ch: 4 (Optimization) (4.1,
Calculus 4.3, 4.4) (maxima and
minima
Ch5: (Integration)
5.4(Fundamental theorem
of calculus)
concepts of limits &
continuity, derivatives
and integration
 They’ll apply the
concepts on finding
maxima and minima –
the first step towards
optimization

 Students will learn the

Thomas’ Calculus
4-5
Calculus Ch:11 (746-748, 761-
765,794-795,800,805-808)
sequences, series and
sums
 Application of series to
present value
computations
Taylor Series expansion

6 Students will learn

 functions of multiple
Thomas’ Calculus variables
 how to take derivatives
Ch:14 (965-966, of a multivariate function
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Partial Derivatives 14.2,14.3,14.4)
Mean Value optimization
Zill & Cullen
Chapter 1.1 (pages 2-5)
Introduction to first order Chapter 2 (2.2,2.3,2.4)
differential equations
7
Finance
In this module, students will learn the basic concept of time value of money as a mathematical concept.
Students will also study the theory of interest rates in continuous time. Students will also be introduced to the
concept of arbitrage and its application to pricing of financial derivatives will be discussed.
Principles of Managerial
Time value of money Finance 13th Edition
Chapter 5 (Finn 100
readings)
8 mathematical concepts to
Paul Wilmott introduces
Quantitative Finance
Second Edition Chapter 1
(1.6)
9 Kavin J Hasting
Theory of interest rates Ch: 1 (1.1,1.2,1.3 & 1.6)
 how to interpret the
derivatives
 the application of partial
derivatives in Lagrangian
optimization (Overview
of Mean Variance
optimization problem)
(Overview)
Students will learn first
order differential equations
and their solutions using
integrating factors and
separation of variables
Differential equations are an
integral part of financial
modeling. The session will
prepare students to think
about analytical solutions, if
any, of the financial
instruments and modeling of
the financial instruments.
Time value of money
concepts will be given and
discussed with students to
emphasize the need to
model interest rates and
other financial instruments
Students will learn
 Rate of return and
present value
 Compound interest
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 Annuities
 Measuring rate of
return
 Continuous time
interest

Students will be given the

J Robert Buchanan
Arbitrage Pages (81-84)
Kevin J Hastings (5.1.2)
10
Students are advised to
bring examples of
arbitrage for class
discussion
concept of arbitrage in
finance. They will be
provided with example of
taking advantage of
arbitrage and how pricing is
mostly based on no
arbitrage arguments

Students will learn to price

11 Pricing of Financial Instruments Class Notes futures and options contract
using Arbitrage arguments using arbitrage arguments

Probability Theory
Randomness is a core concept in finance, especially when we model the financial securities and instruments. It
provides the analytical tools to solve practical problems in the complex and rapidly evolving world of today's
financial industry. Due to the randomness involved in the financial industry, we work in a probabilistic way.
The module provides the essential concepts that are required for defining and understanding the modeling of a
Brownian motion.

Students will learn the

Probability theory
Random experiments, random
variable, events, sample space
12
Grimmett & Stirzekar
Chapter 2 (2.1 (25-29), 32)
concepts in probability
theory from a mathematical
side. The will learn
 What constitutes a
random experiment
 What is a random
variable
 What we mean by events
 How do we define
sample space

13-14 In this session, they will

Grimmett & Stirzekar learn
Algebra, Sigma algebra, filtration,  The concepts required to
measure, probability measure, Chapter 1: (Pages 1-14) define probability space
probability space  Concepts such as
 Lahore University of Management Sciences
algebra, sigma algebra,
filtration will be
introduced to students
 Measure will be defined
as a function
 Probability measure and
probability space will be
defined

Expectations, conditional Grimmett & Stirzekar Expectations, conditional

expectations, independence Ch: 3 (3.1,3.2,3.3,3.7) expectations and
15-16 Ch:4 (4.1,4.2,4.3,4.6) independent events will
defined using mathematical
definitions

Mid term exam

17
Normal distribution, mean variance
and moment generating function
Log-normal distribution
18-20
Normal distribution has an
essential role in the theory
J Robert Buchanan of randomness in finance.
Chapter 3 The distribution function,
mean, variance and moment
generating function of a
normal distribution will be
discussed in the sessions.
The usage of moment
generating function in
finding moments will be
discussed. By the end of the
sessions, students will be
comfortable will the
concepts that are required in
stochastic calculus.

Randomness concepts in Finance

The module on randomness concepts in finance provides the basics of quantitative and computational finance.
The module starts with discussion of a random walk, the pattern the stocks follow in reality are discussed for
comparison. Brownian motion is defined, and its properties are discussed as the basic ingredient of the
mathematics of finance and stochastic calculus. The modeling of financial instruments is all based on the
concept and modeling of randomness. The students will learn those basic concepts in the module.

Session 21 Students will learn

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J Robert Buchman  the concept or
Random Walk Chapter 5 randomness
 random walk and its
properties
 how to formulate a
random walk

Brownian motion will be

J Robert Buchman defined as
Chapter 5  as a continuous time limit
of a random walk
22 Brownian motion  as a random variable from
a normal distribution
 Alternative definition of a
Brownian motion

 Students will learn

Properties of Brownian motion
martingale, markov process
23-24
different properties of
J Robert Buchman Brownian motion such as
Chapter 5 scaling, time inversion,
time reversal
Ubbo F Wiersema  The will learn to show
Pages (31- 37) whether a process is a
Brownian motion or not
 Students will learn
martingales and will
show that Brownian
motion is a martingale
 Students will learn the
Markov property and
will show that the BM is
Markov

 We model stock prices as

a geometric Brownian
motion, in this session
25
students will learn the
Geometric Brownian motion and its Lecture Notes properties of a geometric
properties, Brownian motion

26-27 Stock prices as a lognormal process Students will learn the

John Hull - stock prices as a lognormal
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Pricing options using Monte Carlo Chapter 8 process
Simulation - Applications of modeling
randomness
- Monte Carlo simulation
for pricing an option

(3 hours lab session)

Concluding the course Mandatory session
28

TEXTBOOK(S)/SUPPLEMENTARY READINGS
1. J Robert Buchanan. An Undergraduate Introduction to Financial Mathematics, World Scientific
Publishing Company, 3rd Edition, [ISBN 9789814407441] (Finance and Randomness)
2. Kevin J. Hastings. Introduction to Financial Mathematics, Chapman and Hall, 2015. [ISBN
9781498723909] (Finance and Randomness)
3. Geoffrey R Grimmett and David R Stirzekar, Probability and Random Processes, Oxford University
Press, 3rd Edition, 2001. [ISBN-13: 978-0198572220] (Probability Theory)
4. George B Thomas, Maurice D Weir, Joel Hass and Franke R Giordano, Thomas’ Calculus, 11th
Edition, Addison Wesley, 2004. [ISBN 9780321185587] (Calculus review)
5. Dennis G Zill and Micheal R Cullen, Differential Equations with Boundary Conditions, 7th Edition,
Cengage Learning, 2009. [ASIN: B008UB1WJE] (Introduction to Differential Equations
Overview)