Admission Requirements
No particular requirement for students having successfully completed basic 1st- and 2nd-year BSc courses in physics, astronomy or mathematics. Students with a different background are advised to seek prior interaction with the instructors.
Description
This course introduces how physics and physics concepts play a role in the dynamics of financial markets. At its core is the equivalence between the heat equation and the Black- Scholes equation for option pricing. We build on this to explore the dynamics of financial markets, volatility and the problems of pricing of financial derivatives. We will highlight both commonalities and differences between physics and finance questions. During the lab sessions, students will have a chance to implement gradually more complex derivative pricing models and use their output to trade on a simulated exchange.
Topics:
Lecture 1: Introduction to Financial Markets & Instruments.
Lecture 2: From the Heat Equation to Black-Scholes and Option Pricing.
Lecture 3: Greeks; its physical interpretation, characteristics and dynamics.
Lecture 4: Stochastic volatility and the Heston model.
Lecture 5: Local volatility; American Style Options.
Lecture 6: Exotic options and summary.
Course objectives
Understanding financial markets and how physics can play a crucial role in modelling financial derivatives and price them.
Transferable skills
Scientific curiousity, creating connections among different contexts and disciplines, thinking out of the box, being able to formulate hypotheses about problems for which one has no prior knowledge, abstraction and generalization in a multidisciplinary context.
Timetable
See timetable in Brightspace
You will find the timetables for all courses and degree programmes of Leiden University in the tool MyTimetable (login). Any teaching activities that you have sucessfully registered for in MyStudyMap will automatically be displayed in MyTimeTable. Any timetables that you add manually, will be saved and automatically displayed the next time you sign in.
MyTimetable allows you to integrate your timetable with your calendar apps such as Outlook, Google Calendar, Apple Calendar and other calendar apps on your smartphone. Any timetable changes will be automatically synced with your calendar. If you wish, you can also receive an email notification of the change. You can turn notifications on in ‘Settings’ (after login).
For more information, watch the video or go the the 'help-page' in MyTimetable. Please note: Joint Degree students Leiden/Delft have to merge their two different timetables into one. This video explains how to do this.
Mode of instruction
See Brightspace
Assessment method
The course is project-based: the final grade is obtained after submitting a project consisting of a pricing/trading algorithm (following the extensive instructions given during the course lectures and tutorials). The deadline for submitting the project is the one that you see as the date for the exam in the schedule. Note: since the course is project-based, there will be no retake (no project resubmission possible after the deadline!). However, each student gets a chance of submitting parts of their project in advance, during the entire time span of the course, in the form of homework assignments: each assignment is a part of the project, that student can submit gradually, until the project is completed at the end. Students who submit the homework assignments will receive feedback of each of them, and also get a chance of resumbitting the entire project at the end, using the feedback received. Homework is judged more on the understanding of concepts rather than on the details of implementation. Having a clean and fully integrated setup might award some bonus points.
Reading list
Slides and other notes/material (will be made available on Brightspace).
Registration
From the academic year 2022-2023 on every student has to register for courses with the new enrollment tool MyStudyMap. There are two registration periods per year: registration for the fall semester opens in July and registration for the spring semester opens in December. Please see this page for more information.
Please note that it is compulsory to both preregister and confirm your participation for every exam and retake. Not being registered for a course means that you are not allowed to participate in the final exam of the course. Confirming your exam participation is possible until ten days before the exam.
Extensive FAQ's on MyStudymap can be found here.
Contact
Lecturers:
Dr. D. Garlaschelli
Artur Swiech
Andrea Fontanari
Robbert Pullen
Remarks
Transferable skills: scientific curiousity, creating connections among different contexts and disciplines, thinking out of the box, being able to formulate hypotheses about problems for which one has no prior knowledge, abstraction and generalization in a multidisciplinary context.