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INTRODUCTION TO NUMERICAL METHODS

Numerical Methods in Finance (Implementing Market Models)


COMPUTATIONAL FINANCE
MSc
©Finbarr Murphy 2007

Agenda
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Course Overview 1

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COMPUTATIONAL FINANCE
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©Finbarr Murphy 2007

Lecture Objectives
 Course Outline
COMPUTATIONAL FINANCE
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©Finbarr Murphy 2007

Numerical Techniques
 A Numerical Technique is a solution to a problem that
is calculated through a SIMULATION.

 A particular process for the underlying asset price is


specified and then using an iterative approach to
solve the value of the option.

 Numerical models can be divided into three main


classes:
COMPUTATIONAL FINANCE

 Lattice models (e.g. Binomial/Trinomial models)


 Finite Difference Models
 Monte Carlo simulations
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Numerical Techniques
 Simulations can only reasonably be conducted through
a computer medium

 The form of the simulations vary so we must have the


computer skills to create simulations

 These are acquired through practice and experience


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MSc

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©Finbarr Murphy 2007

Recommended Texts
 Required/Recommended
 Clewlow, L. and Strickland, C. (1996) Implementing derivative
models, 1st ed., John Wiley and Sons Ltd.
 Gianluca Fusai, Andrea Roncoroni, (2008) Implementing models
in quantitative finance: methods and cases. SpringerLink
— Available on the University online library

 Additional/Useful
 Brandimarte, P. (2006) Numerical methods in finance and
economics: A matlab-based introduction, 2nd Revised ed.,
COMPUTATIONAL FINANCE

John Wiley & Sons Inc.


 Hull, J. (2008) Options, futures and other derivatives, 7th ed.,
Prentice Hall.
MSc