Principles of Financial Computing Course
Principles of Financial Computing
Time: 9:10 ~ 12:10 Wednesday (Spring Semester)
Location: Room 107 of the CSIE Building
On Wall Street, being right on the fundamentals and
wrong on the timing is the same as just being wrong.
Jonathan Cohen
Where is the risk management at J.P. Morgan Chase?
 Bloomberg News, January 16, 2002
10. Of course, I make a lot investing.
I only teach
so I can help young people.
 Top Ten Lies Finance Professors Tell Their Students
 References
 F. J. Fabozzi and Steven V. Mann (Ed.),
The Handbook of Fixed Income Securities. 8th ed.
Irwin, 2012.

J. C. Hull,
Options, Futures, and Other Derivatives. 9th ed. PrenticeHall, 2014.
 R. Jarrow
and S. Turnbull,
Derivative Securities.
2nd ed.
SouthWestern, 1999.
 S. N. Neftci, Principles of Financial Engineering. 2nd ed.
Academic Press, 2008.
 P.
Ritchken,
Derivative Markets: Theory, Strategy, and Applications.
HarperCollins, 1996.
 S. M. Sundaresan,
Fixed Income Markets and Their Derivatives. 3rd ed.
Academic Press, 2009.
 Articles

The Financial Modelers' Manifesto

Goldman Sachs Is a Tech Company (April 12, 2015)

The Medallion Fund, an EmployeesOnly Offering for the Quants at Renaissance Technologies, Is the Blackest Box in all of Finance (November 21, 2016)

The Most Indemand Programming Languages on Wall Street (January 28, 2015)

The Top Ten Technology Skills at BAML, Barclays, Credit Suisse, Citi, Goldman Sachs, JPMorgan, Morgan Stanley and UBS (April 16, 2015)
 Internet Resources
 Teaching Assistant(s)
 Software
To Students,
You will learn a perhaps different perspective on finance,
especially as it pertains to pricing and software engineering.
Our emphasis on computation should add a new dimension and
toolbox to your existing knowledge and financial sense.
(But see Enrollments below.)
It is your
responsibility to learn to write in highlevel programming
languages. We cannot impart that skill in the class.
If the mathematics proves hard going, you are expected to
fill in the gap by selfreading. The technicalities are not
beyond a motivated graduate student's reach.
The major topics covered in the course, time permitting, are listed
below for your reference.
 Time value of money
 Bonds, mortgages, and annuities
 Duration, convexity, and
immunization
 Yield curve,
forward rate, and spot rate
 Option pricing theory
and its wideranging applications
 BlackScholes analysis
 binomial option pricing model (BOPM)
 Futures,
forwards, and other derivatives
 The combinatorics of random walks

Martingale,
Brownian motion,
stochastic calculus, and
Ito integral
 Riskneutral valuation
 Risk management
 Fixedincome securities with embedded options
and interest rate derivatives
 Mortgagebacked securities (MBS)
 Numerical methods
 Monte Carlo methods
 Variance reduction (efficiencyimproving) techniques
 Leastsquares technique
 QuasiMonte Carlo method
 Solving partial differential equations
 Yield curve fitting
 GARCH models
 Interest rate models and
calibration

2017.02.22

2017.03.01

2017.03.08

2017.03.15

2017.03.22

2017.03.29
& 1st assignment due

2017.04.05

2017.04.12

2017.04.19

2017.04.26

2017.05.03
& 2nd assignment due

2017.05.10

2017.05.17

2017.05.24

2017.05.31
& 3rd assignment due

2017.06.07

2017.06.14

2017.06.21
& 4th assignment due
Programming Exercises
Homework should be turned in on time. No late
homework will be accepted without legitimate reasons.
There will be four to six programming
assignments.
Treat each homework as an examination.

You are expected to write your own
codes and turn in your source code.

Do not copy or collaborate with fellow students.

Never ask your friends to write programs for you.

Never give your code to other students or publish your code because it may be copied
and you in turn may be suspected of copying other's code!
The graders will not attempt to sort out who the original coders are because we are not running a court here.

Do program carefully.
It is much more important to get the numbers right than to get a
pretty user interface running.

Write a program to price the vanilla American put and its delta based on the CRR binomial tree.
Inputs: (1) S (spot price), (2) K (strike price), (3) r (riskfree interest rate), (4) s (volatility), (5) T (years), (6) n (the number of periods). Output: (1) put price and (2) delta.
For example, assume S = 100, K = 105, r = 0.05, s = 0.3, T = 0.75, and n = 300. Then the put price is 11.5082 and the delta is −0.4990.
Please send your source code, executable code, and a brief explanation file if necessary (e.g., how to run it?) using the CEIBA system (CSIE 7134) before 08:00 AM of March 29, 2017.
No late submissions will be accepted. Compress your files into a single file and name it StudentID_HW_1 for easy reference. Example: R91922054_HW_1.
Even if you need to make an appointment with 盧政良 for demonstration because of the unusual software you use, you still have to submit the files before the deadline.

Write a program to price Europeanstyle Asian singlebarrier upandout calls based on the CRR binomial tree. The payoff of this call at expiration date is max(average  X, 0)
if the running average never touches or penetrates the barrier and 0 otherwise.
Inputs: S (stock price at time 0), X (strike price), H (barrier, which is higher than S), t (maturity in years), s (%) (annual volatility), r (%) (continuously compounded annual interest rate),
n (number of periods), and k (number of states per node). For example, when S = 100, X = 90, H = 110, t = 1 (years), s = 30%, r = 5%, n = 120, and k = 200, the price is about 2.9976.
Please send your source code, executable code, and a brief explanation file if necessary (e.g., how to run it?) using CEIBA system (CSIE 7134) before 08:00 AM of May 3, 2017.
No late submissions will be accepted. Compress your files into a single file and name it StudentID_HW_2 for easy reference. Example: R91723054_HW_2.
Even if you need to make an appointment with 盧政良 for demonstration because of the unusual software you use, you still have to submit the files before the deadline.

Write a leastsquares Monte Carlo program to price American puts. Output its price and standard error. Inputs: S (stock price at time 0), X (strike price), T (maturity in years), s (%) (annual volatility), r (%) (continuously compounded annual interest rate), n (number of periods), and k (number of simulation paths).
For example, when S = 101, X = 105, T = 1 (years), s = 15%, r = 2%, n = 50, and k = 100,000, the price is about 7.3634 and the standard error is about 0.0221.
Please send your source code, executable code, and a brief explanation file if necessary (e.g., how to run it?) using CEIBA system (CSIE 7134) before 08:00 AM of May 31, 2017.
No late submissions will be accepted. Compress your files into a single file and name it StudentID_HW_3 for easy reference. Example: R91723054_HW_3.
Even if you need to make an appointment with 盧政良 for demonstration because of the unusual software you use, you still have to submit the files before the deadline.

Write a program to price American put options based on the GARCH model (RitchkenTrevor algorithm). Output its price.
Inputs:
E (days before expiration), r (%) (annual interest rate), S (stock price at time 0),
h_{0}, b_{0},
b_{1},
b_{2}, c, X (strike price),
n_{1} (number of partitions per day), n_{2} (number of variances per node).
For example, the option price is about 2.1883 when
E = 30,
r (%) = 1,
S = 100,
h_{0} = 0.010469,
b_{0} = 0.000006575,
b_{1} = 0.9,
b_{2} = 0.04,
c = 0,
X = 100,
n_{1} = 2,
n_{2} = 2.
Please send your source code, executable code, and a brief explanation file if necessary (e.g., how to run it?) using CEIBA system (CSIE 7134) before 08:00 AM of June 21, 2017.
No late submissions will be accepted. Compress your files into a single file and name it StudentID_HW_4 for easy reference. Example: R91723054_HW_4.
Even if you need to make an appointment with 盧政良 for demonstration because of the unusual software you use, you still have to submit the files before the deadline.
Enrollments

Nonprogrammers will be strongly discouraged
as the probability of passing this course is slim,
if possible at all.

It is not impossible to pick up programming skills before
the first assignment.

Financial knowledge is a plus, but again it can be picked up if you are motivated.