FE 610 Stochastic Calculus for

Financial Engineers
August 24, 2014
Instructor:
Office:
Phone:

Thomas Lonon
Altorfer 303
TBD

Email: tlonon@stevens.edu
Office hours: F 3:00pm -5:00pm and by appt.

Sections
FE 610 B
Tues. 3:00-5:30 PM
FE 610 C
Thurs. 3:00-5:30 PM
FE 610 WS Wed. 6:15-8:45 PM

Babbio Center 203

Babbio Center 221
Online(Tentative Time)

Objectives
This course is designed for first year graduate students in Financial Engineering. The goal is to learn the foundation on which financial engineering
is built upon. It is highly recommended that students have a strong background in applied mathematics (analysis) and probability. This is a core
course for all programs in Financial Engineering.

Textbook(s):
I will provide notes additional to the textbook material. The main textbooks
used are:
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 Stochastic Calculus for Finance vol I and II, by Steven E. Shreve,

Springer Finance, 2004, ISBN-13: 978-0387249681 (vol I) and 9781441923110 (vol II).
Although we will primarily work within the second volume.
In addition the following textbooks provide additional references:
Introduction to Probability Models, 10th edition, by Sheldon M. Ross,
Academic Press, 2009, ISBN-10: 0123756863 ISBN-13: 978-0123756862.
Probability and Random Processes by Geoffrey Grimmett and David
Stirzaker, Oxford University Press 2001.
Stochastic Differential Equation, by Bernt ksendal, 6th edition, 2010,
ISBN-10: 3540047581, ISBN-13: 978-3540047582
Introduction to the Mathemtics of Financial Derivatives, by Salih N
Neftci, 2nd ed, Associated Press, 2000, ISBN 0125153929.
Handbook of Probability, by I. Florescu and C. Tudor, ISBN: 978-0-47064727-1, Oct. 2013.

Course schedule
The rough schedule is as follows:

Week
Week 1
Week 2
Week 3
Week 4

Material
Probability review: Random variables
and vectors. Stochastic processes.
Random walk. Brownian motion.
Types of Convergence and Quadratic Variation
Markov Property and First Passage Times

Week
Week
Week
Week
Week
Week
Week
Week
Week
Week

Reflection Principle and Passage Distributions

Stochastic Calculus(Integrands)
Ito lemma and applications
Midterm
Black-Scholes-Merton Model
Multivariable Stochastic Calculus
Risk-Neutral Measure and Girsanov
PDEs and SDEs
Poisson Processes and Jump Diffusion
Review and Catch-Up/Special Topics

5
6
7
8
9
10
11
12
13
14

Reference
Ch. 1 and 2 in vol II
Ch. 3 in vol II
notes and Ch.3 in vol. II
Ch. 3 in vol II,
Ch. 4,5 in Vol. I
Ch. 3 in vol II
Ch. 4 in vol II
Ch. 4 in vol II
Ch. 4 in vol II
Ch. 4 in vol II
Ch. 5 in vol II
Ch. 6 in vol II
Ch. 11 in vol II
TBD

Homework, Exams and Grading:

The final grade in the class will be determined in the following manner:
20% Homeworks
30% Midterm
50% Final Exam

Academic Misconduct
When submitting an assignment, please make sure that the work is your
own. If you submit work that is not your own, the penalties will progress as
follows each time:
1. In the case where a group of students have too similar of work, the
points for the problem/assignment will be divided evenly amongst the
group. If the work is from another source; a person not currently
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enrolled in the class, solutions manual, etc., the points will be split
between the student and the source.
2. A zero will be given on the assignment
3. A failing grade will be given for the course.

Homeworks
There will be around 6 homework assignment throughout the semester. Collaboration is encouraged as it can be helpful to understand some of these
concepts. Do not confuse collaboration for academic misconduct. Attempt
each problem on your own before seeking help from another person. Make
sure that you understand the entire assignment that you turn in, and could
reproduce the work or solve a similar problem. Do not think that you can
simply copy another persons assignment and expect to understand the material. Late homeworks will be accepted under the following policy. If the
homework is turned in within one week of the original due date, it will receive
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of its score, going down by a third each week it is late.
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Exams
There will be one midterm and one final exam given in the class. If you
miss an exam, you must provide a written explanation signed by proper
authorities in order to be allowed the chance to take a replacement exam.
The midterm and final exam are closed book, but each student can bring one
hand written page of notes to the midterm and two hand written pages of
notes to the final. Calculators are permitted, but cell phones and notebook
computers are not allowed.