Math 373: Financial Mathematics

Meets: Tuesday from 1:30 to 2:45 in WTHR 172 Thursday from 9:30 to 10:20 in WTHR 104 Thursday from 1:30 to 2:45 in WTHR 172

Instructor: Jeff Beckley Office: 818 Mathematics Building Phone: 49—40493 or 317-698-8543 E-mail: [email protected] Web http://www.math.purdue.edu/~jbeckley/

Office Hours: Tuesday Noon to 1:30 Thursday Noon to 1:30 or by appointment

General Information

The course will cover the learning objectives for the Society of Actuaries Examination FM and the Casualty Actuarial Society Examination 2.

The course is also an excellent course for business or finance majors who want an introduction to derivatives and a full understanding of financial mathematics.

Textbook: Mathematical Interest Theory, Second Edition By James Daniel and Leslie Vaaler Published by Mathematical Association of America ISBN 978-0-88385-754-0

Derivative Markets, Second Edition By Robert L. McDonald Published by Addison Wesley, ISBN 0-321-28030-X

Notes on Textbooks: The first edition of Mathematical Interest Theory is exactly the same as the second edition. If you can get it cheaper, it is fine to get the first edition.

For Derivative Markets, you need the second edition. The paperback version is less expensive. Some students in the past have purchased the “international” version because it has been less expensive. It appears to be the same as the non-international version. Calculators

The only calculators permitted for this class will be those permitted to be used on the Society of Actuaries examinations in the Spring of 2011. The Society of Actuaries website states: “Candidates may ONLY use the battery or solar–powered Texas Instruments BA–35 model calculator, the BA II Plus*, the BA II Plus Professional*, the TI–30Xa or TI–30X II* (IIS solar or IIB battery), or TI-30XB MultiView (XS Solar or XB Battery). Candidates may use more than one of the approved calculators during an examination.” The best one for this class is the Texas Instruments BAII Plus or Texas Instruments BAII Plus Professional. For the purpose of this class, it will be assumed that you have this calculator. Use of any other calculator on a test or quiz will result in a zero on that test or quiz.

The class website has instructions from the Society of Actuaries website for either calculator that you choose.

The student is expected to learn the functionality of the calculator as part of the preparation for class exams and the Exam FM/Exam 2. Some of the calculator functionality will be covered in class. Please bring your calculator to each class.

Procedures

Evaluation will be based on a combination of tests, quizzes, and homework assignments.

There will be 7 quizzes during the semester. Quizzes will be announced. The lowest quiz grade will be disregarded.

There will be 3 tests of an hour and 15 minutes each and a two hour final. The final will NOT be comprehensive.

All tests and quizzes will be closed book and closed notes. Calculators are allowed. Quizzes cannot be made up under any circumstances. There will be no makeup exams except in extreme circumstances and then only with a prior arrangement with the instructor.

Final grades will be based on the following weights:

Quizzes 24% Homework 4% Test 1 18% Test 2 18% Test 3 18% Final 18% Total 100%

Homework: Homework is due at the beginning of the class. Doing the homework is essential to understanding the material. No homework will be accepted past the due date, but your lowest two homework scores will be dropped.

For homework, quizzes, and tests, answers are expected to include all the work necessary to do the problems. Grades

Grades will be on a plus/minus scale as follows:

Score Grade 99.5% and above A+ 94-99.4 A 90-93.9 A- 87-89.9 B+ 83-86.9 B 80-82.9 B- 77-79.9 C+ 73-76.9 C 70-72.9 C- 67-69.9 D+ 63-66.9 D 60-62.9 D- 59.9 and below F

Cheating

• Cheating will not be tolerated! • Copying someone else’s HW is Cheating! • If you cheat on HW or Quiz, penalty is a zero on the homework or Quiz and 5% of the total score for the class. • If you cheat on a Test, you will receive a failing grade in this class.

Academic Adjustments

Students who have been certified by the Office of the Dean of Students -- Adaptive Programs as eligible for academic adjustments should go to MATH 242 and request an Information Sheet for this semester that explains how to proceed this semester to get these adjustments made in Mathematics courses. (Procedures are not the same as last semester.) This should be done during the first week of classes. Only students who have been certified by the ODOS-Adaptive Programs and who have requested ODOS to send their certification letters to their instructors are eligible for academic adjustments.

Students who are currently undergoing an evaluation process to determine whether they are eligible for academic adjustments, are encouraged to find out now what procedures they will have to follow when they are certified, by requesting the above mentioned Information Sheet from MATH 242.

Large print copies of the Information Sheet are available from MATH 242 upon request. Course Outline April 26, 2011

While this outline tries to be complete and accurate, there will be changes in the schedule of the course; these will be announced in class and on the class website. The reading is to be done by the date listed and the homework is to be turned in on the date listed. For example, prior to class on January 13, you are to read Sections 1.1 to 1.5 in the book and you will turn in the Homework listed on the 18th.

The Homework for the class will consist of the problems from the book listed below. Additionally, there will be homework problems that I will hand out. The homework handed out will also be posted on the class website.

Day Date Reading Class Homework Tu 1/11 Th AM 1/13 1.1-1.5 Th PM 1/13 1.6-1.7 Tu 1/18 1.8-1.9 Homework on Website – 1-28 Th AM 1/20 1.10 Th PM 1/20 1.11-1.12, 1.14 Homework on Website – 29-42 Tu 1/25 2.1-2.3 Homework on Website – 43-63 Th AM 1/27 2.3-2.5 Th PM 1/27 2.6-2.7 Chapter 2 Homework 1-13 Tu 2/1 Snow Day Th AM 2/3 3.2-3.3 Th PM 2/3 3.2-3.4 Chapter 2 Homework -14-27 Tu 2/8 3.5-3.6 Chapter 3 Homework 1-26 Th AM 2/10 3.7-3.8 Th PM 2/10 3.9 Chapter 3 Homework 27-36 Tu 2/15 3-10, 3-13, Chapter 3 Homework 37-62, 64 Th AM 2/17 Review Th PM 2/17 Test 1 - Class Tu 2/22 4.2-4.5, 5.1-5.2 Chapter 3 Homework 65, 63, 66-72 - Work in this order. Th AM 2/24 5.3 Th PM 2/24 5.4, 6.1 Chapter 4 Homework 1-10 Tu 3/1 6.2-6.4 Chapter 5 Homework 1-17 Th AM 3/3 6.5 Th PM 3/3 6.6 Tu 3/8 No Class Th AM 3/10 Review Th PM 3/10 Test 2 - Class Chapter 6 Homework 1-10 and 11-24 Tu 3/15 Spring Break Th AM 3/17 Spring Break Th PM 3/17 Spring Break Tu 3/22 6.9, Th AM 3/24 7.1,8.3, Th PM 3/24 8.3, 9.1-9.2 Chapter 6 Homework 25-26 Tu 3/29 9.3-9.4 Chapter 7 Homework 1-6 Chapter 8 Homework 1-8 Th AM 3/31 9.5 Th PM 3/31 Review Day Date Reading Class Homework

Tu 4/5 Test 3 - Class Chapter 9 Homework 1-19 Th AM 4/7 Chapter 1 Th PM 4/7 Chapter 2 including App. 2A Tu 4/12 Chapter 2 including App. 2A Chapter 1 – 1.3-1.7 Th AM 4/14 Chapter 3 Th PM 4/14 Chapter 3 Chapter 2 – 2.1-2.7, 2.13, 2.14 Tu 4/19 Chapter 4 Th AM 4/21 Chapter 4 Th PM 4/21 Chapter 5 (5.1 to 5.4 Only) Chapter 3 – 3.1-3.9, 3.12, 3.13, 3.14(a) and (b); including Appendix 5B Handout Problems 1-6 Tu 4/26 Chapter 5 (5.1 to 5.4 Only) including Appendix 5B Th AM 4/28 Chapter 8 (8.1 to 8.2 Only) Th PM 4/28 Chapter 8 (8.1 to 8.2 Only) Chapter 5 – 5.2-5.4, 5.6-5.8, 5.10-5.12, 5.15 Finals 5/2 Final Exam–1:00–WTHR 172 Chapter 8 – 8.1-8.2, 8.6-8.7, 8.10, 8.14

Exam FM/Exam 2 Preparation

Exam FM/Exam 2 is will be offered by the Society of Actuaries and the Casualty Actuarial Society on December 1-8. It will also be offered in the first quarter of 2011. If you want to pass Exam FM/Exam 2, I strongly recommend that you invest 250 hours of study time for the Exam. The 250 hours would include anytime spent for this class, plus additional time working as many problems as possible. During the first day of class, I will go over a recommended study program for those students planning on taking Exam FM/Exam 2.

For this class, between class time and homework, I estimate that you will put in 125 hours. Additionally, go through the Actex or ASM Manual will require about 75 hours. Finally, I will provide you with sufficient exam preparation problems that will require about 50 hours.

Students Not Taking Exam FM/Exam 2

If you are not taking Exam FM/Exam 2, you only need to do the Homework for the Class. If you master these problems and the material, you should have no problem achieving an A in the Course.