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1Mathematical Logic
1.1 Introduction
1.2 Axiomatic Theory
1.3 Inferences
Proof by Induction
*1.6 Mathematical Logic
1.7 Applications to Finance
Exercises
2Number Systems and Functions
2.1 Numbers: Properties and Structures
2.1.1 Introduction
2.1.2 Natural Numbers
2.1.3 Integers
2.1.4 Rational Numbers
2.1.5 Real Numbers
*2.1.6 Complex Numbers
2.2 Functions
2.3 Applications to Finance
2.3.1 Number Systems
2.3.2 Functions
Present Value Functions
Accumulated Value Functions
Nominal Interest Rate Conversion Functions
Bond-Pricing Functions
Mortgage- and Loan-Pricing Functions
Preferred Stock-Pricing Functions
Common Stock-Pricing Functions
Portfolio Return Functions
Forward-Pricing Functions
3Euclidean and Other Spaces
3.1 Euclidean Space
3.1.1 Structure and Arithmetic
3.1.2 Standard Norm and Inner Product forRn
*3.1.3 Standard Norm and Inner Product forCn
3.1.4 Norm and Inner Product Inequalities forRn
*3.1.5 Other Norms and Norm Inequalities forRn
3.2 Metric Spaces
3.2.1 Basic Notions
3.2.2 Metrics and Norms Compared
*3.2.3 Equivalence of Metrics
3.3 Applications to Finance
3.3.1 Euclidean Space
Asset Allocation Vectors
Interest Rate Term Structures
Bond Yield Vector Risk Analysis
Cash Flow Vectors and ALM
3.3.2 Metrics and Norms
Sample Statistics
Constrained Optimization
Tractability of the lp-Norms: An Optimization Example
General Optimization Framework
4Set Theory and Topology
4.1 Set Theory
4.1.1 Historical Background
*4.1.2 Overview of Axiomatic Set Theory
4.1.3 Basic Set Operations
4.2 Open, Closed, and Other Sets
4.2.1 Open and Closed Subsets ofR
4.2.2 Open and Closed Subsets ofRn
*4.2.3 Open and Closed Subsets in Metric Spaces
*4.2.4 Open and Closed Subsets in General Spaces
4.2.5 Other Properties of Subsets of a Metric Space
4.3 Applications to Finance
4.3.1 Set Theory
4.3.2 Constrained Optimization and Compactness
4.3.3 Yield of a Security
5Sequences and Their Convergence
5.1 Numerical Sequences
5.1.1 Deﬁnition and Examples
5.1.2 Convergence of Sequences
5.1.3 Properties of Limits
*5.2 Limits Superior and Inferior
*5.3 General Metric Space Sequences
5.4 Cauchy Sequences
5.4.1 Deﬁnition and Properties
*5.4.2 Complete Metric Spaces
5.5 Applications to Finance
5.5.1 Bond Yield to Maturity
Interval bisection for bond yield
5.5.2 Interval Bisection Assumptions Analysis
6Series and Their Convergence
6.1 Numerical Series
6.1.1 Deﬁnitions
6.1.2 Properties of Convergent Series
6.1.3 Examples of Series
*6.1.4 Rearrangements of Series
6.1.5 Tests of Convergence
6.2 The lp-Spaces
6.2.1 Deﬁnition and Basic Properties
*6.2.2 Banach Space
*6.2.3 Hilbert Space
6.3 Power Series
*6.3.1 Product of Power Series
*6.3.2 Quotient of Power Series
6.4 Applications to Finance
6.4.1 Perpetual Security Pricing: Preferred Stock
6.4.2 Perpetual Security Pricing: Common Stock
6.4.3 Price of an Increasing Perpetuity
6.4.4 Price of an Increasing Payment Security
6.4.5 Price Function Approximation: Asset Allocation
6.4.6 lp-Spaces: Banach and Hilbert
7Discrete Probability Theory
7.1 The Notion of Randomness
7.2 Sample Spaces
7.2.1 Undeﬁned Notions
7.2.2 Events
7.2.3 Probability Measures
7.2.4 Conditional Probabilities
Law of Total Probability
7.2.5 Independent Events
7.2.6 Independent Trials: One Sample Space
*7.2.7 Independent Trials: Multiple Sample Spaces
7.3 Combinatorics
7.3.1 Simple Ordered Samples
With Replacement
Without Replacement
7.3.2 General Orderings
Two Subset Types
Binomial Coe‰cients
The Binomial Theorem
r Subset Types
Multinomial Theorem
7.4 Random Variables
7.4.1 Quantifying Randomness
7.4.2 Random Variables and Probability Functions
7.4.3 Random Vectors and Joint Probability Functions
7.4.4 Marginal and Conditional Probability Functions
7.4.5 Independent Random Variables
7.5 Expectations of Discrete Distributions
7.5.1 Theoretical Moments
Expected Values
Conditional and Joint Expectations
Mean
Variance
Covariance and Correlation
General Moments
General Central Moments
Absolute Moments
Moment-Generating Function
Characteristic Function
*7.5.2 Moments of Sample Data
Sample Mean
Sample Variance
Other Sample Moments
7.6 Discrete Probability Density Functions
7.6.1 Discrete Rectangular Distribution
7.6.2 Binomial Distribution
7.6.3 Geometric Distribution
7.6.4 Multinomial Distribution
7.6.5 Negative Binomial Distribution
7.6.6 Poisson Distribution
7.7 Generating Random Samples
7.8 Applications to Finance
7.8.1 Loan Portfolio Defaults and Losses
Individual Loss Model
Aggregate Loss Model
7.8.2 Insurance Loss Models
7.8.3 Insurance Net Premium Calculations
Generalized Geometric and Related Distributions
Life Insurance Single Net Premium
Pension Beneﬁt Single Net Premium
Life Insurance Periodic Net Premiums
7.8.4 Asset Allocation Framework
7.8.5 Equity Price Models in Discrete Time
Stock Price Data Analysis
7.8.7 Discrete Time European Option Pricing: Scenario Based
8Fundamental Probability Theorems
8.1 Uniqueness of the m.g.f. and c.f
8.2 Chebyshev’s Inequality
8.3 Weak Law of Large Numbers
8.4 Strong Law of Large Numbers
8.4.3 The Strong Law Approach
*8.4.4 Kolmogorov’s Inequality
*8.4.5 Strong Law of Large Numbers
8.5 De Moivre–Laplace Theorem
8.5.1 Stirling’s Formula
8.5.2 De Moivre–Laplace Theorem
8.5.3 Approximating Binomial Probabilities I
8.6 The Normal Distribution
8.6.1 Deﬁnition and Properties
8.6.2 Approximating Binomial Probabilities II
*8.7 The Central Limit Theorem
8.8 Applications to Finance
8.8.1 Insurance Claim and Loan Loss Tail Events
Risk-Free Asset Portfolio
Risky Assets
8.8.2 Binomial Lattice Equity Price Models as Dt?0
Parameter Dependence on Dt
Distributional Dependence on Dt
Real World Binomial Distribution as Dt?0
8.8.3 Lattice-Based European Option Prices as Dt?0
The Model
European Call Option Illustration
Black–Scholes–Merton Option-Pricing Formulas I
8.8.4 Scenario-Based European Option Prices as N?T
Option Price Estimates as N?T
Scenario-Based Prices and Replication
The Meaning of ‘‘Discontinuous’’
*The Metric Notion of Continuity
Sequential Continuity
9.2.3 Basic Properties of Continuous Functions
9.2.4 Uniform Continuity
9.2.5 Other Properties of Continuous Functions
9.2.6 Ho¨lder and Lipschitz Continuity
9.2.7 Convergence of a Sequence of Continuous Functions
*Series of Functions
*Interchanging Limits
*9.2.8 Continuity and Topology
9.3 Derivatives and Taylor Series
9.3.1 Improving an Approximation I
9.3.2 The First Derivative
9.3.3 Calculating Derivatives
A Discussion of e
9.3.4 Properties of Derivatives
9.3.5 Improving an Approximation II
9.3.6 Higher Order Derivatives
Analytic Functions
analytic functions
9.3.8 Taylor Series Remainder
9.4 Convergence of a Sequence of Derivatives
9.4.1 Series of Functions
9.4.2 Di¤erentiability of Power Series
Product of Taylor Series
*Division of Taylor Series
9.5 Critical Point Analysis
9.5.1 Second-Derivative Test
*9.5.2 Critical Points of Transformed Functions
9.6 Concave and Convex Functions
9.6.1 Deﬁnitions
9.6.2 Jensen’s Inequality
9.7 Approximating Derivatives
9.8 Applications to Finance
9.8.1 Continuity of Price Functions
9.8.2 Constrained Optimization
9.8.3 Interval Bisection
9.8.4 Minimal Risk Asset Allocation
9.8.5 Duration and Convexity Approximations
Dollar-Based Measures
Embedded Options
Rate Sensitivity of Duration
9.8.6 Asset–Liability Management
Surplus Immunization, Time tF0
Surplus Immunization, Time tI0
Surplus Ratio Immunization
9.8.7 The ‘‘Greeks’’
9.8.8 Utility Theory
Investment Choices
Insurance Choices
Gambling Choices
Utility and Risk Aversion
Examples of Utility Functions
9.8.9 Optimal Risky Asset Allocation
9.8.10 Risk-Neutral Binomial Distribution as Dt?0
Analysis of the Risk-Neutral Probability: q(Dt)
Risk-Neutral Binomial Distribution as Dt?0
*9.8.11 Special Risk-Averter Binomial Distribution as Dt?0
Analysis of the Special Risk-Averter Probability: q(Dt)
Special Risk-Averter Binomial Distribution as Dt?0
Details of the Limiting Result
9.8.12 Black–Scholes–Merton Option-Pricing Formulas II
10Calculus II: Integration
10.1 Summing Smooth Functions
10.2 Riemann Integration of Functions
10.2.1 Riemann Integral of a Continuous Function
10.2.2 Riemann Integral without Continuity
Finitely Many Discontinuities
*Inﬁnitely Many Discontinuities
10.5.2 The Derivative of an Integral
10.6 Improper Integrals
10.6.1 Deﬁnitions
10.6.2 Integral Test for Series Convergence
10.7 Formulaic Integration Tricks
10.7.1 Method of Substitution
10.7.2 Integration by Parts
*10.7.3 Wallis’ Product Formula
10.8 Taylor Series with Integral Remainder
10.9 Convergence of a Sequence of Integrals
10.9.1 Review of Earlier Convergence Results
10.9.2 Sequence of Continuous Functions
10.9.3 Sequence of Integrable Functions
10.9.4 Series of Functions
10.9.5 Integrability of Power Series
10.10 Numerical Integration
10.10.1 Trapezoidal Rule
10.10.2 Simpson’s Rule
10.11 Continuous Probability Theory
10.11.1 Probability Space and Random Variables
10.11.2 Expectations of Continuous Distributions
*10.11.3 Discretization of a Continuous Distribution
10.11.4 Common Expectation Formulas
Standard Deviation
10.11.5 Continuous Probability Density Functions
Continuous Uniform Distribution
Beta Distribution
Exponential Distribution
Gamma Distribution
Cauchy Distribution
Normal Distribution
Lognormal Distribution
10.11.6 Generating Random Samples
10.12 Applications to Finance
10.12.1 Continuous Discounting
10.12.2 Continuous Term Structures
Bond Yields
Forward Rates
Fixed Income Investment Fund
Spot Rates
10.12.3 Continuous Stock Dividends and Reinvestment
10.12.4 Duration and Convexity Approximations
10.12.5 Approximating the Integral of the Normal Density
Power Series Method
Upper and Lower Riemann Sums
Trapezoidal Rule
Simpson’s Rule
*10.12.6 Generalized Black–Scholes–Merton Formula
The Piecewise ‘‘Continuitization’’ of the Binomial Distribution
The ‘‘Continuitization’’ of the Binomial Distribution
The Limiting Distribution of the ‘‘Continuitization’’
The Generalized Black–Scholes–Merton Formula
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Introduction to Quantitative Finance a Math Tool Kit

# Introduction to Quantitative Finance a Math Tool Kit

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Published by: nebruh on May 23, 2011

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