Instructor: Ari Stern

Email: astern@math.wustl.edu

Office: Cupples I, 211B

Office Hours: TuTh 2-3pm

Problem sets will be posted approximately biweekly, and will be
collected at the beginning of class on the due date. You are
encouraged to discuss the homework with your fellow students and
to collaborate on problems, but
*your final write-up must be your own*. Please make sure that your
solutions are written clearly and legibly.

Sasha Tettenhorst (sasha.tettenhorst@wustl.edu) is responsible for grading the homework assignments.

- HW1: handout [pdf]. Due Friday, September 4.
- HW2: handout [pdf]. Due Friday, September 18.
- HW3: Exercises 3.22 and 3.25. Due Friday, September 25.

*Note:*In the text, the "domestic" currency is the Canadian dollar, not the US dollar. Be careful! - HW4: handout [pdf]. Due Friday, October 9.
- HW5: Exercises 6.7, 6.8, 6.9. Due Friday, October 30.

*Hint:*In Exercise 6.8, notice that the assumption implies that R(1) and S(1) have positive covariance. - HW6: Exercises 7.11, 7.12, 7.14, 7.15. Due Friday, November 6.
- HW7: Derive the formulas for rho given in equations
(9.18) and (9.19), and do Exercises 10.10, 10.12,
10.13. Due Friday, November 20.

*Note:*The exercises have several typos and omissions, so here are some corrections. For Exercise 10.10, the initial price is S=80. For Exercises 10.12 and 10.13, use r=0.1 (not 0.01), σ=0.15, K=80, and N=4; also, "δt" should be "Δt". - HW8: handout [pdf]. Due Friday, December 4.

Lectures will be held MWF 1-2pm, in Brown 118. The first class will be on Monday, August 24, and the last will be on Friday, December 4. Class will be canceled for Labor Day (Monday, September 7), Fall Break (Friday, October 16), and Thanksgiving Break (Wednesday, November 25, and Friday, November 27).

There was one in-class midterm exam, held on Wednesday, October 21. The final exam was held on Wednesday, December 16, from 1-3pm.

Grades will be based on a weighted average of homework (40%, lowest score dropped), midterm exam (20%), and final exam (40%).

The text for this course is *Binomial Models in Finance*,
by John van der Hoek and Robert
J. Elliott. Click
here to download the book from the publisher in PDF
format. If you prefer to have a hard copy, a low-cost
paperback version is available for purchase at the same
link.

An introduction to the principles and methods of financial
mathematics, with a focus on discrete-time stochastic
models. Topics include no-arbitrage pricing of financial
derivatives, risk-neutral probability measures, the
Cox-Ross-Rubenstein and Black-Scholes-Merton options pricing
models, and implied volatility. *Prerequisites*: MATH 233
and 3200 or permission of instructor.

This course may not be used as the "additional upper level probability or statistics elective" required for mathematics majors on the probability and statistics track. For the other major tracks, however, it does count as a general "upper level mathematics elective." If you have any questions, please consult the major tracks web page, and speak with your major advisor and/or the Director of Undergraduate Studies, Professor Ron Freiwald.