306-468 Numerical Techniques in Finance and Investment

Prerequisite/s:

Timetable:

Contact:

Objectives:

Students should acquire familiarity with a range of numerical techniques in finance and investments and financial modelling and problem solving skills using both electronic spreadsheets and computer programmes. A familiarity with text and journal literature useful in solving numerical problems in finance and investments will also be acquired.

On completion of this subject a student should gain an understanding and working knowledge of:

• a spreadsheet package at an advanced level including data modelling and simulation tools;

• programming in a high level event driven object orientated computer language;

• error propagation and the limits of machine arithmetic;

• efficient computation methods of factorial and polynomial expansions;

• interpolation and approximation;

• numerical search techniques such as bisection and Newton-Raphson;

• solutions of systems of equations by direct and indirect methods;

• Monte Carlo simulation;

• lattice methods in option pricing;

• applications of these techniques to solve problems in finance and investments.

Content:

The use of Microsoft Excel at an advanced level, including the use of inbuilt functions and data modelling tools such as Goalseek and Solver. Programming in Microsoft Visual Basic for Applications, including the writing of functions and subroutines, interface design and output generation. Computer accuracy, stability and convergence; electronic spreadsheets and elementary computer programming; interpolation and approximation procedures; methods of numerical search, Monte Carlo methods; numerical integration techniques; solution methods for systems of equations. Applications include: Models of the term structure of interest rates, option pricing, valuation of bond options, implied option volatility, the dynamics of portfolio insurance programmes, portfolio simulation, portfolio optimisation, the composition of stock plus warrant packages of known value, determination of internal rates of return, capital budgeting.

Assessment: