Course description
Stochastic Calculus
The use of probability theory in financial modelling can be traced back to the work on Bachelier at the beginning of last century with advanced probabilistic methods being introduced for the first time by Black, Scholes and Merton in the seventies.
Modern financial quantitative analysts make use of sophisticated mathematical concepts, such as martingales and stochastic integration, in order to describe the behaviour of the markets or to derive computing methods.
This course bridges the gap between mathematical theory and financial practice by providing a hands-on approach to probability theory, Markov chains and stochastic calculus. Participants will practice all relevant concepts through a batch of Excel based exercises and workshops.
Upcoming start dates
Suitability - Who should attend?
This "Stochastic Calculus" course is designed for the following individuals:
- Quantitative analysts,
- Financial engineers,
- Researchers,
- Risk managers,
- Structurers,
- Market analysts and product controllers.
Past participants have included: Chief investment officers, Asset Managers, Strategists, Private Banks, Relationship Managers.
Course requirements: A good understanding of Elementary Probability Theory, Calculus and Linear Algebra
Training Course Content
This Stochastic Calculus course provides a comprehensive overview of the following subjects:
Day One
Probability Theory
- Random variables, independence and conditional independence. Discrete random variables: mass density, expectation and moments calculation
- Conditional discrete distributions, sums of discrete random variables
- Continuous random variables; Probability density function, cumulative probability density function; Expectation and moments calculation; Conditional distributions and conditional expectation; Functions of random variables
Examples: Normal distribution, gamma distribution, exponential distribution, Poisson distribution
Exercise: Properties of the gamma distribution and the log-normal distribution
Workshop: Multivariate normal distributions. Linear transformations. Counter-example
- Generating functions. Moment generating functions. Characteristic functions
- Convergence theorems: the strong law of large numbers, the central limit theorem
Examples: Characteristic functions of Bernoulli, binomial, exponential distributions
Exercise: Moment generating functions and characteristic functions of Poisson, normal and multivariate normal distributions
Markov Chains
- Discrete time Markov chains, the Chapman-Kolmogorov equation
- Recurrence and transience. Invariance
- Discrete martingales. Martingale representation theorem. Convergence theorems
Examples: Random walks: simple, reflected, absorbed
Workshop: Pricing European options within the Cox-Ross-Rubinstein model
- Continuous time Markov chains. Generators
- Forward/backward equations. Generating functions
Example: The Poisson process
Exercise: Superposition of Poisson Processes. Thinning
Day Two
Stochastic Calculus
- The Wiener process. Path properties. Monte Carlo simulation
- Gaussian processes. Diffusion processes
Examples: The Wiener process with drift. The Brownian Bridge
Exercise: The Geometric Brownian Motion. Properties of its distribution (moments)
- Semi-martingales. Stochastic integration
- Ito's formula. Integration by parts formula
Workshop: Multivariate normal distributions. Linear transformations. Counter-example
Examples: Characteristic functions of Bernoulli, binomial, exponential distributions
Exercises: Moment generating functions and characteristic functions of Poisson, normal and multivariate normal distributions
Stochastic Differential Equations
- Stochastic differential equations. Existence and uniqueness of solutions. Equations with explicit solutions
- The Markov property. Girsanov's theorem
Exercise: The Vasicek model. Connection with the O-U process. Mean. Variance. Covariance. Pricing zero-coupon bonds
Workshop: The Cox Ingersoll Ross Model. Connection with the O-U process. Properties of its distribution (mean variance, covariance). Pricing zero-coupon bonds
Course delivery details
Courses are delivered in the London classroom and live online via LFS Live in London, New York, and Singapore time zones.
Please contact LFS for more details.
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