NPTEL Syllabus

Mathematical Finance - Web course

COURSE OUTLINE
Basics of Financial Markets: Introduction and main theme of mathematical
finance, financial markets terminology, time value of money, bonds and bonds
pricing, yield, term structure of interest rates, financial instruments, types of
derivatives, concept of arbitrage.
Portfolio Management: Portfolios, returns and risk, risk-reward analysis, mean
variance portfolio optimization, Markowitz model, Capital Asset Pricing Models
(CAPM).
Probability spaces, filtrations, random variables, conditional expectations,
random processes, martingales.
Discrete-time Finance: Pricing by arbitrage, risk-neutral probability measures,
valuation of contingent claims, pricing and hedging of European and American
derivatives as well as fixed-income derivatives in Cox-Ross-Rubinstein (CRR)
model.
Stochastic Calculus: Brownian motion, martingales, Its formula, It integral,
risk-neutral measure, SDE; Risk-neutral measure, Girsanov's theorem,
martingale representation theorems, representation of Brownian martingales,
Feynman-Kac formula.

NPTEL
http://nptel.iitm.ac.in

Mathematics
Pre-requisites:
Elements of Probability Theory,
Calculus and Partial Differential
Equations
Additional Reading:

Continuous-time Finance: Black-Scholes-Merton (BSM) model, derivation of the

BSM partial differential equation, the Black-Scholes formula, self-financing
strategies and model completeness, risk neutral measures, the fundamental
theorems of asset pricing, pricing of American options, forwards and futures in
BSM model.

1. G. R. Grimmett and D. R.
Stirzaker, Probability and
Random Processes, 3rd Edition,
Oxford University Press, 2001.

COURSE DETAIL

2. M. Capinski and P.E. Kopp,

Measure, Integral and Probability,
2nd Edition, Springer, 2007.

Module
No.

Topic/s

Lectures

Basics of Financial Markets: Introduction and main

theme of mathematical finance, financial markets and
terminology, time value of money, interest rate, discount
rate, bonds and bonds pricing, yield curves, duration and
convexity, term structure of interest rates, spot and
fo rw a rd rates, net present value, net future value,
financial instruments, underlying and derivative
securities, types of derivatives, options, forwards, futures,
swaps, concept of arbitrage.

Portfolio Modeling and Analysis: Portfolios, returns and

risk, risk-reward analysis, asset pricing models, mean
variance portfolio optimization, Markowitz model and
efficient frontier calculation algorithm, Capital Asset
Pricing Models (CAPM).

Probability Essentials: Probability spaces, filtrations as

information content, random variables, conditional
expectations, Definition and classification of random
processes, martingales.

Discrete-time Finance: Pricing by arbitrage, risk-neutral

3. R. J. Elliott and P. E. Kopp,

Mathematics of Financial
Markets, Springer, 1999.
Coordinators:
Dr. M.P. Rajan
Department of MathematicsIIT
Guwahati
Dr. N. Selvaraju
Department of MathematicsIIT
Guwahati

probability measures, valuation of contingent claims,

fundamental theorem of asset pricing, Cox-RossRubinstein (CRR) model, pricing and hedging of
European and American derivatives as well as fixedincome derivatives in CRR model, general results related
to prices of derivatives.

Stochastic Calculus: Brownian motion, martingales,

Its formula, It integral, risk-neutral measure, SDE;
Risk-neutral measure, Girsanov's theorem for change of
measure,
martingale representation
theorems,
representation of Brownian martingales, Feynman-Kac
formula.

Continuous-time Finance: Black-Scholes-Merton model

of stock prices as geometric Brownian motion, derivation
of the Black-Scholes-Merton partial differential equation,
the Black-Scholes formula and simple extensions of the
model, self-financing strategies and model completeness,
risk neutral measures, the fundamental theorems of asset
pricing, continuous time optimal stopping and pricing of
American options, forwards and futures in Black-ScholesMerton model.

10

References:
1. M. Capinski and T. Zastawniak, Mathematics for Finance: An Introduction
to Financial Engineering, Springer, 2005.
2. J. C. Hull, Options, Futures and Other Derivatives, 7th Edition, Pearson
Education, 2009.
3. S. Shreve, Stochastic Calculus for Finance, Vol. 1 and Vol. 2, Springer,
2004.
A joint venture by IISc and IITs, funded by MHRD, Govt of India

http://nptel.iitm.ac.in