Mathematics 483, Mathematical Models in Finance and Investments, Fall 2018

Illinois State University Mathematics Department

Instructors

Classes Meet

Tuesdays and Thursdays 6:00-7:50 p.m. (with a ten minute break), in Stevenson Hall, room 325.

Office Hours

Office hours will be held Tuesdays 2:30 p.m.– 3:50 p.m., in Stevenson Hall room 313G, by Dr. Krzysztof Ostaszewski. Please ask for an appointment at other times. Appointments with Dr. Krzysztof Ostaszewski should be scheduled at: http://smartURL.it/appointment.

Textbooks

There will be study notes, practice exams, and optional readings for presentation in class provided by Dr. Krzysztof Ostaszewski  in Reggienet.
The following textbooks are suggested, but not required:

• Financial Risk Management for Pension Plans by Leslaw Gajek and Krzysztof Ostaszewski, Elsevier Science, 2004. This book is on reserve at the Milner Library at Illinois State University and on reserve at the library of the Department of Mathematics.

• Financial Economics, edited by Harry Panjer, published in 1998 by the Actuarial Foundation. This book is on reserve at the Milner Library at Illinois State University.
• Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th edition, McGraw-Hill, 2014, ISBN 9780077861674.
• John Hull, Options, Futures and Other Derivatives, 9th Edition, Pearson, 2016, ISBN: 9780133456318.

Students can earn extra credit for making presentations in class and for discussions in class on advanced readings, mostly related to the Society of Actuaries Quantitative Finance and Investment Track Fellowship exams, and to the Casualty Actuarial Society Course 9 Examination on Financial Risk and Rate of Return. Some potential readings for presentation are provided in the class online platform, in Reggienet.

Objective

The objective of this class is to help you learn about mathematical models in finance and investments, as utilized in the management as well as financial supervision of insurance enterprises and other financial intermediaries.

Grading

There will be a total of five tests. Any of the comprehensive tests (as indicated in the schedule) can count as a final. Because there will be so many opportunities for testing and only the best four test scores will affect the class grade, no make-up tests will be offered. The final will count as 40% of your grade, and the best two of the remaining tests will count as 30% of your grade each. You will also receive up to 10% extra credit for the best of the remaining tests. The grading scale for will be as follows: 90% or better — A, 80% to 90% — B, 70% to 80% — C, 60% to 70% — D, below 60% — F. Links to past professional actuarial examinations are provided below, and those professional examinations should serve as a guidance of what kind of material students can expect on the tests. However, the tests in this class will be quantitative only, no essay questions will be given. Even though questions will be quantitative only, students are encouraged to explain their work thoroughly. Students will also have an opportunity to earn extra creditby making presentations in class on the readings suggested in Reggienet or other readings from Fellowship level examninations of the Society of Actuaries or the Casualty Actuarial Society. Those presentations must be set well in advance with Dr. Ostaszewski, and presentations scheduled at the last minuted before the end of the semester may be denied.

Important dates

Illinois State University withdrawal information for the Fall 2018 semester is given at this web site: http://www.registrar.ilstu.edu/registration/withdrawal/fall.shtml.

Student Access and Accommodation Services

Illinois State University provides a welcoming atmosphere for individuals with disabilities by assisting each in functioning independently within the University community and providing equal access and opportunity in accomplishing educational, professional and personal goals. Disability Concerns, a unit of the Student Affairs Division,  is the designated office to provide approved accommodation services for students, faculty, staff, and guests with disabilities. Disability Concerns obtains and maintains documentation of disability, certifies eligibility for services, determines reasonable accommodations, and develops plans for providing such accommodations. This is accomplished in a confidential manner to ensure equal opportunity for participation in all courses, programs, activities and employment offered by Illinois State University. Please contact the Disability Concerns in Fell Hall room 350, tel.  309-438-5853 (Voice), 309-438-8620 (TTY), web site: http://www.disabilityconcerns.ilstu.edu/, if you have needs that can be accommodate by that office.

No recording of this class is allowed

Students may not photograph or use audio or video devices to record classroom lectures or discussions or visual materials that accompany them (e.g., lecture slides, whiteboard notes/equations). Students with disabilities who need to record classroom lectures or discussions must contact Student Access and Accommodation Services to register, request and be approved for an accommodation. Students who violate this policy may be subject to both legal sanctions for violations of copyright law and disciplinary action under the University’s Code of Student Conduct.

Schedule of classes

• Tuesday, August 21, 2018. Overview of assets, liabilities and capital of financial intermediaries and regulatory supervision of them.
• Thursday, August 23, 2018. Financial Assets. Review of derivatives securities. Role of derivative securities in financial intermediaries.
• Tuesday, August 28, 2018. Brownian Motion and Black-Scholes Model. Black-Scholes-Equation.
• Thursday, August 30, 2018. Ito Processes, Ito’s Lemma.Valuation of derivative securities.
• Tuesday, September 4, 2018. Special presentation on catastrophe modeling by Ms. Minchong Mao, FCAS, ASA, MAAA, Catastrophe Modeling Manager at State Farm Insurance Companies. This class will be held in Stevenson Hall room 401A and it will be an event of the Actuarial Program.
• Thursday, September 6, 2018. Interest rates derivatives and their modeling and relevance in management of an insurance firm.
• Tuesday, September 11, 2018. Stochastic processes modeling interest rates.
• Thusday, September 13, 2018. Stochastic processes modeling interest rates.
• Tuesday, September 18, 2018. No-Arbitrage Pricing Theory.
• Thursday, September 20, 2018. No-Arbitrage Pricing Theory.
• Tuesday, September 25, 2018. This class will be replaced by the Meet the Firms event.
• Thursday, September 27, 2018. No-Arbitrage Pricing Theory.
• Tuesday, October 2, 2018. Test No. 1, on the material covered through September 27, 2018.
• Thursday, October 4, 2018. Interest Rate Risk Management. Chapter 9 in first textbook. Class taught by Dr. Wei Hao.
• Tuesday, October 9, 2018. Interest Rate Risk Management. Chapter 9 in first textbook. Class taught by Dr. Wei Hao.
• Thursday, October 11, 2018. Interest Rate Risk Management. Chapter 9 in first textbook. Class taught by Dr. Wei Hao.
• Tuesday, October 16, 2018. Equilibrium Pricing. Class taught by Dr. Wei Hao.
• Thursday, October 18, 2018. Equilibrium Pricing. Class taught by Dr. Wei Hao.
• Tuesday, October 23, 2018. Equilibrium Pricing. Class taught by Dr. Wei Hao.
• Thursday, October 25, 2018. Equilibrium Pricing. Class taught by Dr. Wei Hao.
• Tuesday, October 30, 2018. Derivative securities embedded in insurance contracts. 
• Thursday, November 1. 2018. Insurance securitization.
• Tuesday, November 6, 2018 . Test No. 2, on the material covered through November 1, 2018.
• Thursday, November 8, 2018. Special presentation on asset-liability management in practice at State Farm Insurance by Dr. Wei Hao, FSA, CFA, MAAA.This class will be held in Stevenson Hall room 401 and it will be an event of the Actuarial Program.
• Tuesday, November 13, 2018. Introduction to Enterprise Risk Management. Coherent Risk Measures.
• Thursday, November 15, 2018. Theory of capital for insurance firms: Expected Policyholder Deficit.
• Tuesday, November 27, 2018. Value at Risk. Conditional tail expectation.
• Thursday, November 29, 2017. Risk-Based Capital in the U.S. insurance regulation. Overview of Solvency II and Swiss Solvency Test. Shortfall Constraints.
• Tuesday, December 4, 2018. Test No. 3, comprehensive.
• Thursday, December 6, 2018. Test No. 4, comprehensive.
• Tuesday, December 11, 2018, 6:00 p.m. — 8:00 p.m., Test No. 5, comprehensive.

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All information contained here is, to our best knowledge, correct, but it is merely a representation, and should not be considered to be any form of professional advice. This electronic publication should not be misconstrued as the official position of Illinois State University, or its Department of Mathematics. We are glad to provide as much information as possible here, but we kindly ask that in any decision related to matters listed here you seek additional counsel and information. Comments on this Home Page are welcome and should be sent to Dr. Krzysztof Ostaszewski  at his e-mail address: krzysio@ilstu.edu.