UNIVERSITY OF ZIMBABWE

FACULTY OF SCIENCE
DEPARTMENT OF MATHEMATICS
COURSE OUTLINE: Introduction to Financial Mathematics
Lecturer: Mr P Sibanda
Course number: HMTH216
Lecture hours per semester: 48 Hrs
Duration: 1 Semester
Office: M236
HMTH216 Introduction to Financial Mathematics

Synopsis of Lectures

Duration 1 Semester (s)

Courses for which this is pre-or co- requisite: MTHH202, 211,232

1. Aims

To introduce students to financial markets and analyze financial contracts using mathematical
techniques.

2. Course content

Financial Derivatives

A brief Introduction, Introduction, Definitions, Types of Derivatives, Forwards and Futures,

Options, Swaps.

Binomial tree model

Lattice Models, Payouts, Arbitrage pricing

Calculus in Deterministic and Stochastic Environments

Introduction, Some Tools of Standard Calculus, Functions.

Pricing Derivatives

Models and Notation: Introduction, Pricing Functions, Application: Another Pricing Method, The
Problem

Tools in Probability Theory

Introduction, Probability, Moments, Conditional Expectations, Some Important Models, Markov
Processes and Their Relevance, Random Variables.

Martingales and Martingale Representations

Introduction, Definitions, The use of Martingales in Asset Pricing, Relevance of Martingales in

Stochastic Modeling, Examples of Martingales, The Simplest Martingale, The First Stochastic
Integral, Martingale Methods and Pricing, A Pricing Methodology.

The Wiener Process

Brownian motions properties and application to finance

Integration in Stochastic Environments

The Ito Integral: Introduction, The Ito Integral, Properties of the Ito Integral, Other Properties of
the Ito Integral.

Ito’s Lemma

Introduction, Types of Derivatives, Ito’s Lemma, The Ito Formula, Uses of Ito’s Lemma, Integral
Form of Ito’s Lemma

The Dynamics of Derivatives Prices

Stochastic Differential Equations

Pricing Derivative Products

Partial Differential Equations, Introduction, Forming Risk – Free Portfolios, Accuracy of the
Method, Partial Differential Equations,

The Black – Scholes PDE

An Application: Introduction, The Black – Scholes PDE, PDEs in Asset Pricing, Exotic Options
Solving PDEs in Practice.

3. Methods/Strategies to be used

lectures, discussion, tutorials.

4. Student Assessment

Students will write three one-hour tests/ or assignments after every four weeks. The average of
the tests/ assignments will constitute the coursework mark where 50% of the coursework mark
will contribute to the final mark. A 2-hour final examination will be written in the 14th or 15th
week of the semester. The examination will contribute 50% to the final mark.
Recommended Reading

• A course in financial calculus, Alison Etheridge.

• An Introduction to the Mathematics of Financial Derivatives, Salih N. Neftci.
• Financial Calculus, An Introduction to derivative pricing, Martin Baxter & Andrew
Rennie.

Additional Reading

• Options, Futures & Other Derivatives, John C. Hull (Prentice-Hall International, Inc).
• Derivatives, The Theory and Practice of Financial Engineering, P. Wilmott (Wiley).