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
payment is made)
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.
AY201314 Sem1 MA3269 (Selflearning)
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).
AY201314 Sem1 MA3269 (Selflearning)
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
AY201314 Sem1 MA3269 (Selflearning)
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
AY201314 Sem1 MA3269 (Selflearning)
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
\

=
) (
) ( 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
= +
AY201314 Sem1 MA3269 (Selflearning)
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.
AY201314 Sem1 MA3269 (Selflearning)
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
AY201314 Sem1 MA3269 (Selflearning)
NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673
8
Integrals
Standard Integrals
AY201314 Sem1 MA3269 (Selflearning)
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
)
AY201314 Sem1 MA3269 (Selflearning)
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