AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

1
MA3269 Mathematical Finance I
CHAPTER 0 Revision

Series

y
y
y
n n
i
i

=
+
=

1
1
1
0

r
y
i
i

=
1
1
0
provided 1 < r

2
1
1
) 1 (
) 1 ( 1
y
ny n y
iy
n n
i
i

+
=

2
1
1
) 1 (
1
y
iy
i
i

provided 1 < r
) 1 (
2
1
1
+ =

=
n n i
n
i
) 1 2 )( 1 (
6
1
1
2
+ + =

=
n n n i
n
i


n m k u u u
m
k i
i
n
k i
i
n
m i
i
s < =


= = =
,
1



Example
At the beginning of each year, Mr Money deposits $1000 in a savings account that pays annual
interest of 2% at the end of each year. Interests are compounded yearly. How much (to the
nearest $) will he have in the account just before he makes the 30
th
deposit?
Solution
At the end of the 29
th
year (just before the 30
th
payment is made)
1
st
deposit accumulates to 1000(1.02)
29

2
nd
... 1000(1.02)
28

..
29
th
.. 1000(1.02)
1

Amount in account = =

= =

= =
02 . 1 1
02 . 1 1
1020 ) 02 . 1 ( 1000 ) 02 . 1 ( 1000 ) 02 . 1 ( 1000
29 28
0
29
1 i
i
i
i
39568.


AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

2
Limits and Continuity




In the diagram below, the equation f(x) = 0 has 3 distinct real roots between a
and b.




Example

Solution
Let f(x) = 2x
9
x
7
5
f is continuous on [1, 2] and f(1) . f(2) < 0.
By the IVT, f(x
0
) = 0 for some x
0
in the interval (1, 2).




AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

3
Derivatives

First Principles



( ) ) ( ln ) ( )) ( ( )) ( (
) ( ) (
x f x g
dx
d
x f x f
x g x g


AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

4



where
e a
range of f,


Example
Find the derivative of
x
x
2
)
2
1 ( +
Solution
Using the formula ( ), ) ( ln ) ( )) ( ( )) ( (
) ( ) (
x f x g
dx
d
x f x f
dx
d
x g x g
=
|
.
|

\
|
+
+ + + =
|
.
|

\
|
+ + = +
x
x x x x
x
dx
d x x
dx
d
x x x
2
2
)
2
1 ( ln 2 )
2
1 ( )
2
1 ( ln 2 )
2
1 ( )
2
1 (
2 2 2



AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

5



Example
Evaluate the limit
x
x
x
) 1 ( lim
3
+

Solution
) 1 ln(
3
3
lim ) 1 ( lim
x
x
x
x
x
x
e
+

= +

( Note that the given limit is of the indeterminate form

1 ; we use the fact

a b b
e a
ln
= for
positive a and b)
=
) 1 ln( lim
3
x
x
x
e
+


|
.
|

\
|
=

) (

) ( lim
lim since

x f
x
x f
e e
x

=
1
3
) 1 ln(
lim


+
x
x
x
e

The limit
1
3
) 1 ln(
lim

+
x
x
x
is of the indeterminate form
0
0
.
Applying the LHopitals rule , we have
3
1
) 1 ( 3
lim
) 1 ( 3
lim
) 1 ln(
lim
1 3
2
1 3 2
1
3
=
+
=

+
=
+

x
x
x
x
x
x x
x
x

Hence,
3
3
) 1 ( lim e
x
x
x
= +

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

6
Mean Value Theorem
Let f be continuous on ] , [ b a and differentiable on ) , ( b a . There is a number c in (a, b)
such that
a b
a f b f
c f

=
) ( ) (
) ( '
.

Increasing / Decreasing Functions
- A function f is increasing on an interval (a, b) if x > y f(x) > f(y) for x, y in
(a , b).
- A function f is decreasing on an interval (a, b) if x > y f(x) s f(y) for x, y in
(a , b).

Results
Let f be differentiable on some interval (a, b)
- If 0 (x) ' f > on (a, b) , then f is increasing on (a, b)
- If 0 (x) ' f < on (a, b), then f is decreasing on (a, b)


Example
Fix ( ) e , 0 r . Show that the function f(p) =
p
p
r
) 1 ( + , ( ) e , 0 p , is a strictly increasing
function of p.

Solution
It suffices to show that ) 1 ln( ) ( ln : ) (
p
r
p p f p g + = = is increasing in p by showing that
0 ) ( ' > p g for all p > 0.
,
1
) 1 ln(
1
) 1 ln( ) ( '
t
t
t
p
r
p g
p
r
p
r
+
+ =
+
+ = where 0 > =
p
r
t .
We shall prove that ) ( ' p g is decreasing for p > 0 by demonstrating that 0 ) ( " < p g .

dt
d
p g = ) ( "
|
|
.
|

\
|

|
|
.
|

\
|
+
=
|
.
|

\
|
+
+
2 2
) 1 ( 1
) 1 ln(
p
r
t
t
dp
dt
t
t
t < 0
) ( ' p g is decreasing for p > 0
0
1
) 1 ln( lim ) ( ' lim ) ( ' =
|
|
.
|

\
|
+
+ = >

p
r
p
r
p p
p
r
p g p g (Exercise).
This completes the proof.

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

7
Concave / Convex Functions

- A function f is convex (concave upward) on an interval (a, b) if, for all
0 s s 1,
f(y) ) - (1 f(x) ) )y - (1 x f( + s +
- A function f is concave (concave downward) on an interval (a, b) if, for all
0 s s 1,
f(y) ) - (1 f(x) ) )y - (1 x f( + > +

Results

Let f be twice differentiable on some interval (a, b)
- If 0 (x) ' ' f > on (a, b) , then f is convex (concave upward) on (a, b)
- If 0 (x) ' ' f < on (a, b), then f is concave (concave downward) on (a, b)

Jensens Inequalities

- Let f be continuous and convex on the interval J = (a, b) and let x
1
, x
2
, ., x
n

be real numbers in J. For any
n 2 1
,..., , in [0, 1] with

=
=
n
1 i
i
1 . Then,
( )

= =
s |
.
|

\
|
n
1 i
i i
n
1 i
i i
x f x f
- Let f be continuous and concave on the interval J = (a, b) and let x
1
, x
2
, .,
x
n
be real numbers in J. For any
n 2 1
,..., , in [0, 1] with

=
=
n
1 i
i
1 . Then,
( )

= =
> |
.
|

\
|
n
1 i
i i
n
1 i
i i
x f x f
AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

8
Integrals

Standard Integrals







AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

9
Change of Variable Formula


( )
} }
=
) (
) (
) ( ) ( ' ) (
b g
a g
b
a
du u f dx x g x g f


Integration by Parts

Fundamental Theorem of Calculus
| | ( )
b
a
b
a
a F b F dx x F


F(x) ) ( ) ( ) ( ' = =
}
Examples
Find
(i)
}
+
2
0
2
4
dt
t
t

(ii)
}

1
0
2
dt te
t

Solution
(i)


( ) 2 ln
2
1
4 ln 8 ln
2
1

4
1
2
1

4
2
2
1
4
4
0
2
0
2
0
2 2
= =
+
=
+
=
+
}
} }
du
u
dt
t
t
dt
t
t
( let u = t
2
)

AY2013-14 Sem1 MA3269 (Self-learning)

NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

10
(ii)
| |
2
1
0
2 2
1
0
2
1
0
2 1
0
2
4
3
4
1

4
1
2
1
-
2 2
e
e e
dt
e
t
e
dt te
t
t t
t
=
=
|
|
.
|

\
|
+
(

} }















END OF CHAPTER ZERO

If people do not believe that mathematics is simple, it is only because
they do not realize how complicated life is."
John von Neumann