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NMF 1.1 Introduction

- The document provides an overview of a course on numerical and statistical methods for finance, including course objectives, features, assessment rules and criteria, sample models, and introductory models. - Key course objectives are to introduce theoretical and practical financial models, demonstrate appropriate PC use for finance applications, and enhance students' abilities to build and implement models. - Introductory models covered include sequences and partial sums, arithmetic and geometric progressions, drawing functions, finding intersections between functions, and numerically computing polynomials.

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Marjo Kaci
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39 views13 pages

NMF 1.1 Introduction

- The document provides an overview of a course on numerical and statistical methods for finance, including course objectives, features, assessment rules and criteria, sample models, and introductory models. - Key course objectives are to introduce theoretical and practical financial models, demonstrate appropriate PC use for finance applications, and enhance students' abilities to build and implement models. - Introductory models covered include sequences and partial sums, arithmetic and geometric progressions, drawing functions, finding intersections between functions, and numerically computing polynomials.

Uploaded by

Marjo Kaci
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Numerical (and Statistical) Methods for Finance Module 1

Introductory Lecture

Contents
Course objectives and development Recalls on the spreadsheet Introductory models

Course objectives
To introduce theoretical and practical models on financial calculus To make students aware of the appropriate PC use in the financial applications To show the PC potential in a wide range of financial applcations. To enhance the model building and implementation process.

Course features
Lectures Supervised lab activities Home work required to reach the proper background for good benefit from the course Specific home work

Assessment rules
Written test on a paper sheet, using a pen (not a pencil!) and a pocket calculator Completion of the models made available in draft, in .pdf format, on the course site, to be also enriched for wider applications Oral test on the background theory and the models implementation details

Assessment criteria
The final evaluation of the module will based on the grades achieved in the three tasks:
Written test Colloquium Models completion

The student must prove his/her own intellectual property of the presented models. Furthermore, these caracteristics will be appreciated:
Autonomy Models correctness Initiative Ability to access data sources

Non exhaustive models sample list


Accumulation function Short term treasury bonds Financial tables and representation of the cash flows of an annuity transaction Debt redemption schedules (amortization plan) at a fixed or variabile interest rate Accumulation plan (fixed and variable rate)

Models (cont.)
Value function vs interest rate, IRR Adjusted Present Value Duration of a general portfolio and of a security paying fixed coupons IRR-COST vs IRR_VAR Pseudo-random numbers generation

Spreadsheet recalls
Copy and Paste Relative and absolute references Native functions of a spreadsheet:
Mathematical Financial Date Logical Statistical

Graphs

Introductory models
Sequence and sequence of partial sums Pithagorean Table Drawing a real function of a real variable in a closed domain Computation of a polynomial pn(x) Intersection between two functions Generation of a random time series

Sequences and partial sums


Problem
Represent on a spreadsheet an arbitrary sequence showing a finite number of terms, randomly generated, and compute the partial sums sequence. Then, deal with arithmetic and geometric progressions

Sequence and partial sums


{an}n=1,2, {Sn}n=1,2, Sequence Partial sums sequence defined as

S
{Fn}n=1,2,

t =1

at

Partial products sequence

Fn = at
t =1

Sequence and partial sums (example)


t 0 1 2 3 4 5 6 7 at 2 3 -1 1 2 -1 3 4 St 2 5 4 5 7 6 9 13

Recurrence equations and closed form of the partial sums for the aritmetic and geometric progressions
St = as = as + at = St 1 + at
s =0 s =0 t t 1

at = at 1 + d = a0 + td at = at 1q = a0 q t
d: common difference q: common ratio

Sn =

2 1 q n +1 S n = a0 1 q

[a0 + (a0 + nd )] (n + 1)

a0 : scale factor

Arithmetic progressions
Arithmetic progression : at at 1 = d at = at 1 + d = a0 + td Sn =

2 2a n + 2a0 + dn 2 + dn = 0 = 2 dn 2 + (2a0 + d )n + 2a0 = Parabola 2

[a0 + (a0 + nd )] (n + 1) =

Geometric progressions
Geometric progression : at = at 1q = a0 q t 1 q n +1 S n = a0 q = a0 1 + q + q + ... + q = a0 1 q t =0
n t

at =q at 1

lim S n = a0
n

1 q n +1 a = 0 1 q 1 q

1 < q < 1

Drawing a function in a domain [a,b]

Intersection points between two functions


Example:

y = 2 x 2 + 3 x + 1 y = x + 1 2 x 2 + 3 x + 1 = x + 1 2 x 2 + 2 x = 0 x1 = 0 y1 = 1 x2 = 1 y2 = 2

Intersection points between two functions


Graphical representation:

Beyond the analytical solutions


What can we do if we are not able to find the solution in closed form? We proceed numerically How is it performed automatically on a spreadsheet?

10

Computation of a polynomial for given values of x


pn ( x ) = a0 x n + a1 x n1 + ... + an 1 x + an = ah x n h
h=0 n

1 a0 = , a1 = 2, a2 = 1, a3 = 4 2 1 p3 ( x ) = x 3 + 2 x 2 x + 4 2 1 p3 (1) = 1 + 2 1 1 + 4 = 4.5 2 1 p3 (2 ) = 8 + 2 4 2 + 4 = 6 2

n n 1 pn (x ) = a0 x + a1 x + ... + an 1 x + an n 1 n2 pn 1 (x ) = a0 x + a1 x + ... + an 1 pn ( x ) 64444 4 744444 8 n n 1 a0 x + a1 x + ... + an 1 x + an =

Numerical computation of a polynomial by recurrence

= a0 x n 1 + a1 x n 2 + ... + an 1 x + an 14444 24444 3


p n1

Recurrence equation : pn (x ) = pn 1 (x )x + an , p0 (x ) = a0

11

Numerical computation of a polynomial by recurrence


In the previous example for x = 1 we would get : 1 p0 (1) = 2 1 3 p1 (1) = 1 + 2 = 2 2 3 1 p2 (1) = 1 1 = 2 2 1 1 p3 (1) = 1 + 4 = 4 2 2

Numerical computation of a polynomial by recurrence


In the previous example for any x we would get : 1 2 1 p1 ( x ) = x + 2 2 1 p2 ( x ) = x 2 + 2 x 1 2 1 p3 ( x ) = x 3 + 2 x 2 x + 4 2 p0 ( x ) =

12

Numerical computation of a polynomial for a set of values of x


t at i 0 1 2 3 4 5 6 7 8 9 10 x 0,00 0,50 1,00 1,50 2,00 2,50 3,00 3,50 4,00 4,50 5,00 p -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 -0,5 2 1,75 1,5 1,25 1 0,75 0,5 0,25 0 -0,3 -0,5 -1 4,000 -0,125 3,938 0,5 4,500 0,875 5,313 1 6,000 0,875 6,188 0,5 5,500 -0,125 3,563 -1 0,000 -2,125 -5,563 -3,5 -13,500 p0(x) p1(x) p2(x) p3(x) 0 1 2 3 -0,5 2 -1 4
10 . 0 0 0

5. 00 0

0. 00 0 0. 00 0. 50 1. 0 0 1. 5 0 2. 00 2 .5 0 3. 00 3. 50 4 .0 0 4. 50 5. 00

-5. 00 0

-10 . 0 0 0

-15 . 0 0 0

13

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