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# AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

1
MA3269 Mathematical Finance I
CHAPTER 0 Revision

Series

y
y
y
n n
i
i

=
+
=

1
1
1
0

r
y
i
i

=
1
1
0
provided 1 < r

2
1
1
) 1 (
) 1 ( 1
y
ny n y
iy
n n
i
i

+
=

2
1
1
) 1 (
1
y
iy
i
i

provided 1 < r
) 1 (
2
1
1
+ =

=
n n i
n
i
) 1 2 )( 1 (
6
1
1
2
+ + =

=
n n n i
n
i

n m k u u u
m
k i
i
n
k i
i
n
m i
i
s < =

= = =
,
1

Example
At the beginning of each year, Mr Money deposits \$1000 in a savings account that pays annual
interest of 2% at the end of each year. Interests are compounded yearly. How much (to the
nearest \$) will he have in the account just before he makes the 30
th
deposit?
Solution
At the end of the 29
th
year (just before the 30
th
1
st
deposit accumulates to 1000(1.02)
29

2
nd
... 1000(1.02)
28

..
29
th
.. 1000(1.02)
1

Amount in account = =

= =

= =
02 . 1 1
02 . 1 1
1020 ) 02 . 1 ( 1000 ) 02 . 1 ( 1000 ) 02 . 1 ( 1000
29 28
0
29
1 i
i
i
i
39568.

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

2
Limits and Continuity

In the diagram below, the equation f(x) = 0 has 3 distinct real roots between a
and b.

Example

Solution
Let f(x) = 2x
9
x
7
5
f is continuous on [1, 2] and f(1) . f(2) < 0.
By the IVT, f(x
0
) = 0 for some x
0
in the interval (1, 2).

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

3
Derivatives

First Principles

( ) ) ( ln ) ( )) ( ( )) ( (
) ( ) (
x f x g
dx
d
x f x f
x g x g

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

4

where
e a
range of f,

Example
Find the derivative of
x
x
2
)
2
1 ( +
Solution
Using the formula ( ), ) ( ln ) ( )) ( ( )) ( (
) ( ) (
x f x g
dx
d
x f x f
dx
d
x g x g
=
|
.
|

\
|
+
+ + + =
|
.
|

\
|
+ + = +
x
x x x x
x
dx
d x x
dx
d
x x x
2
2
)
2
1 ( ln 2 )
2
1 ( )
2
1 ( ln 2 )
2
1 ( )
2
1 (
2 2 2

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

5

Example
Evaluate the limit
x
x
x
) 1 ( lim
3
+

Solution
) 1 ln(
3
3
lim ) 1 ( lim
x
x
x
x
x
x
e
+

= +

( Note that the given limit is of the indeterminate form

## 1 ; we use the fact

a b b
e a
ln
= for
positive a and b)
=
) 1 ln( lim
3
x
x
x
e
+

|
.
|

\
|
=

) (

) ( lim
lim since

x f
x
x f
e e
x

=
1
3
) 1 ln(
lim

+
x
x
x
e

The limit
1
3
) 1 ln(
lim

+
x
x
x
is of the indeterminate form
0
0
.
Applying the LHopitals rule , we have
3
1
) 1 ( 3
lim
) 1 ( 3
lim
) 1 ln(
lim
1 3
2
1 3 2
1
3
=
+
=

+
=
+

x
x
x
x
x
x x
x
x

Hence,
3
3
) 1 ( lim e
x
x
x
= +

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

6
Mean Value Theorem
Let f be continuous on ] , [ b a and differentiable on ) , ( b a . There is a number c in (a, b)
such that
a b
a f b f
c f

=
) ( ) (
) ( '
.

Increasing / Decreasing Functions
- A function f is increasing on an interval (a, b) if x > y f(x) > f(y) for x, y in
(a , b).
- A function f is decreasing on an interval (a, b) if x > y f(x) s f(y) for x, y in
(a , b).

Results
Let f be differentiable on some interval (a, b)
- If 0 (x) ' f > on (a, b) , then f is increasing on (a, b)
- If 0 (x) ' f < on (a, b), then f is decreasing on (a, b)

Example
Fix ( ) e , 0 r . Show that the function f(p) =
p
p
r
) 1 ( + , ( ) e , 0 p , is a strictly increasing
function of p.

Solution
It suffices to show that ) 1 ln( ) ( ln : ) (
p
r
p p f p g + = = is increasing in p by showing that
0 ) ( ' > p g for all p > 0.
,
1
) 1 ln(
1
) 1 ln( ) ( '
t
t
t
p
r
p g
p
r
p
r
+
+ =
+
+ = where 0 > =
p
r
t .
We shall prove that ) ( ' p g is decreasing for p > 0 by demonstrating that 0 ) ( " < p g .

dt
d
p g = ) ( "
|
|
.
|

\
|

|
|
.
|

\
|
+
=
|
.
|

\
|
+
+
2 2
) 1 ( 1
) 1 ln(
p
r
t
t
dp
dt
t
t
t < 0
) ( ' p g is decreasing for p > 0
0
1
) 1 ln( lim ) ( ' lim ) ( ' =
|
|
.
|

\
|
+
+ = >

p
r
p
r
p p
p
r
p g p g (Exercise).
This completes the proof.

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

7
Concave / Convex Functions

- A function f is convex (concave upward) on an interval (a, b) if, for all
0 s s 1,
f(y) ) - (1 f(x) ) )y - (1 x f( + s +
- A function f is concave (concave downward) on an interval (a, b) if, for all
0 s s 1,
f(y) ) - (1 f(x) ) )y - (1 x f( + > +

Results

Let f be twice differentiable on some interval (a, b)
- If 0 (x) ' ' f > on (a, b) , then f is convex (concave upward) on (a, b)
- If 0 (x) ' ' f < on (a, b), then f is concave (concave downward) on (a, b)

Jensens Inequalities

- Let f be continuous and convex on the interval J = (a, b) and let x
1
, x
2
, ., x
n

be real numbers in J. For any
n 2 1
,..., , in [0, 1] with

=
=
n
1 i
i
1 . Then,
( )

= =
s |
.
|

\
|
n
1 i
i i
n
1 i
i i
x f x f
- Let f be continuous and concave on the interval J = (a, b) and let x
1
, x
2
, .,
x
n
be real numbers in J. For any
n 2 1
,..., , in [0, 1] with

=
=
n
1 i
i
1 . Then,
( )

= =
> |
.
|

\
|
n
1 i
i i
n
1 i
i i
x f x f
AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

8
Integrals

Standard Integrals

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

9
Change of Variable Formula

( )
} }
=
) (
) (
) ( ) ( ' ) (
b g
a g
b
a
du u f dx x g x g f

Integration by Parts

Fundamental Theorem of Calculus
| | ( )
b
a
b
a
a F b F dx x F

F(x) ) ( ) ( ) ( ' = =
}
Examples
Find
(i)
}
+
2
0
2
4
dt
t
t

(ii)
}

1
0
2
dt te
t

Solution
(i)

( ) 2 ln
2
1
4 ln 8 ln
2
1

4
1
2
1

4
2
2
1
4
4
0
2
0
2
0
2 2
= =
+
=
+
=
+
}
} }
du
u
dt
t
t
dt
t
t
( let u = t
2
)

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

10
(ii)
| |
2
1
0
2 2
1
0
2
1
0
2 1
0
2
4
3
4
1

4
1
2
1
-
2 2
e
e e
dt
e
t
e
dt te
t
t t
t
=
=
|
|
.
|

\
|
+
(

} }

END OF CHAPTER ZERO

If people do not believe that mathematics is simple, it is only because
they do not realize how complicated life is."
John von Neumann