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Physics of Finance

Vak
2024-2025

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. Confidence in calculus and coding with Python is expected.

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: From the Heat Equation to Black-Scholes and Option Pricing.
Lecture 2: Greeks; its physical interpretation, characteristics and dynamics.
Lecture 3: Volatility index.
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

In MyTimetable, you can find all course and programme schedules, allowing you to create your personal timetable. Activities for which you have enrolled via MyStudyMap will automatically appear in your timetable.

Additionally, you can easily link MyTimetable to a calendar app on your phone, and schedule changes will be automatically updated in your calendar. You can also choose to receive email notifications about schedule changes. You can enable notifications in Settings after logging in.

Questions? Watch the video, read the instructions, or contact the ISSC helpdesk.

Note: Joint Degree students from Leiden/Delft need to combine information from both the Leiden and Delft MyTimetables to see a complete schedule. This video explains how to do it.

Mode of instruction

See Brightspace

Assessment method

The course is project-based: the final grade is obtained after submitting a project consisting of a combination of exercises and pricing/trading algorithms (following the extensive instructions given during the course lectures and tutorials). The deadline for submitting the project is indicated in BrightSpace. 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. Forming groups to hand in an additional algorithmic component of the project will provide bonus points for the final grade.

Reading list

Slides and other notes/material (will be made available on Brightspace).

Registration

As a student, you are responsible for enrolling on time through MyStudyMap.

In this short video, you can see step-by-step how to enrol for courses in MyStudyMap.
Extensive information about the operation of MyStudyMap can be found here.

There are two enrolment periods per year:

  • Enrolment for the fall opens in July

  • Enrolment for the spring opens in December

See this page for more information about deadlines and enrolling for courses and exams.

Note:

  • It is mandatory to enrol for all activities of a course that you are going to follow.

  • Your enrolment is only complete when you submit your course planning in the ‘Ready for enrolment’ tab by clicking ‘Send’.

  • Not being enrolled for an exam/resit means that you are not allowed to participate in the exam/resit.

Contact

Contact: Prof. D. Garlaschelli
Lecturers:
Alice Kirichenko
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.

Software
Starting from the 2024/2025 academic year, the Faculty of Science will use the software distribution platform Academic Software. Through this platform, you can access the software needed for specific courses in your studies. For some software, your laptop must meet certain system requirements, which will be specified with the software. It is important to install the software before the start of the course. More information about the laptop requirements can be found on the student website.