Introduction To Numerical Methods in Finance

FE 1015
Numerical Methods I for Finance

Dr. Naleen Ganegoda
Department of Mathematics
University of Sri Jayewardenepura
2013/2014
B.Sc. in Financial Engineering - Diploma Level - FE 1015 Numerical Methods I for Finance
Contents
Introduction
Introduction to the course
Learning outcomes
Syllabus
Introduction to numerical methods
Needs of numerical methods in finance

Discussion session

Main objective of this course is to address knowledge and skills
relevant to numerical methods needed to quantify work in finance field. Thus, your learning process should be designed
with both gaining the knowledge on numerical methods and
applying them in problem solving in finance field.

Main objective of this course is to address knowledge and skills
relevant to numerical methods needed to quantify work in finance field. Thus, your learning process should be designed
with both gaining the knowledge on numerical methods and
applying them in problem solving in finance field.
To cater the above objectives we have,
(i) 10 Lessons
(ii) Worked examples
(iii) Applications in finance
(iv) Computer practical sessions (using MATLAB software)
(v) Assignments
(vi) MCQ question bank
Learning outcomes
At the end of this course you will be able to
(i) identify numerical methods and the needs of them in
finance
(ii) identify sources of numerical errors and error propagation
(iii) quantify numerical errors in approximations
(iv) identify iterative procedures to solve non-linear equations
(v) distinguish different iterative methods and their
concergence in solving non-linear equations
(vi) identify basic concepts in interpolation
(vii) apply different methods of interpolation to make
approximations
(viii) analyse interpolating errors
Learning outcomes ctd...
(ix) distinguish algebraic and numerical methods of solving

systems of linear equations.
(x) solve systems of linear equations numerically by direct and
iterative methods
(xi) quantify the errors in solving systems numerically
(xii) identify basic concepts of numerical differentiation and
integration
(xiii) apply different numerical methods to evaluate derivatives
and integrations
(xiv) determine errors associated with numerical
differentiation and integration
(xv) design MATLAB programs for numerical methods
Syllabus
Lesson 1: Introduction to numerical methods and needs of
numerical methods in finance
Lesson 2: Errors: Sources, Estimation and Analysis
Lesson 3: Numerical methods of solving non-linear equations
Part I - Introduction to iterative procedure
Lesson 4: Numerical methods of solving non-linear equations
Part II - Iterative Methods
Lesson 5: Interpolation
Part I - Introduction to interpolating methods
Lesson 6: Interpolation
Part II - Lagrange and Hermite interpolation,Divided diference
technique, Interpolating error
Syllabus ctd...
Lesson 7: Numerical methods of solving systems of linear

equations
Part I - Preliminaries and direct methods
Lesson 8: Numerical methods of solving systems of linear
equations
Part II - Error analysis and iterative methods
Lesson 9: Numerical Differentiation
Lesson 10: Numerical Integration
Assesment criteria
Assignments/In-class exams (witten & practical) (40%)

End of semester written examination (60%)
Lesson 1
Introduction to numerical methods and needs of
numerical methods in finance

The subject area of numerical methods consists of computational approaches for solving mathematical problems. Rapid
developments in digital computing has underpined the development of numerical methods too. Thus, it provides easier and
faster ways of solving problems. In fact, numerical methods are
the definite alternatives if a problem cannot be solved analytically or available algebraic methods to solve a problem are too
costly in terms of compuational time.

The subject area of numerical methods consists of computational approaches for solving mathematical problems. Rapid
developments in digital computing has underpined the development of numerical methods too. Thus, it provides easier and
faster ways of solving problems. In fact, numerical methods are
the definite alternatives if a problem cannot be solved analytically or available algebraic methods to solve a problem are too
costly in terms of compuational time.
Analysing errors is a major concern associated with numerical
methods. Usually, numerical methods provide approximations
to the desired true solution. Thus, it is important to at least
have bounds on resulting errors.
Introduction to numerical methods ctd...
Aspect of iterative procedures is also a major highlight in some

numerical methods. It incorporates a step by step convergence
towards the required solution according to a defined rule. Faster
computing allows even to practice trial and error methodology
in applying iterative methods.
Introduction to numerical methods ctd...
Aspect of iterative procedures is also a major highlight in some

numerical methods. It incorporates a step by step convergence
towards the required solution according to a defined rule. Faster
computing allows even to practice trial and error methodology
in applying iterative methods.
Skills on designing computer programs is a very important aspect to be developed in studying numerical methods. It evaluates logical thinking abilities to formulate required algorithms
which ultimately highlightes essential component of computer
simulation in any modern applied research.

After the preliminary introduction on numerical methods, let us now
consider why we should learn numerical methods in association with
finance.
What are your thoughts? (discussion session)

finance.
What are numerical in finance? (eg. quantitative factors)

finance.
What are their forms? (eg. rates, integer values, values with
decimals, set/system/series of values, formula input/output,
solutions of equations, etc.)

finance.
What are the types of utilization? (eg. day-to-day financial
transactions, identifying trends in financial markets, research
level incorporations, etc.)

finance.
What are the types of utilization? (eg. day-to-day financial
transactions, identifying trends in financial markets, research
level incorporations, etc.)

Introduction To Numerical Methods in Finance

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FE 1015

Numerical Methods I for Finance

Needs of numerical methods in finance

Introduction to the course

Introduction to the course

Learning outcomes ctd...

(ix) distinguish algebraic and numerical methods of solving

Lesson 7: Numerical methods of solving systems of linear

Assignments/In-class exams (witten & practical) (40%)