Description
Financial Mathematics is the use of mathematical tools to solve financial problems. It is also known as quantitative finance, financial engineering, or computational finance. This field combines ideas from probability, statistics, stochastic processes, and economics to understand and manage financial systems.
Investment banks, hedge funds, insurance firms, and corporate treasuries use financial mathematics for portfolio management, risk assessment, derivative pricing, and scenario analysis. Even industries such as energy, agriculture, and manufacturing rely on it to manage commodity prices and future contracts.
Many people mistakenly believe that mathematical finance predicts stock prices. In reality, it helps determine the value of options and derivatives. For example, an option gives you the right—but not the obligation—to buy a stock at a fixed price in the future.
Suppose Apple shares trade at $50 today. If you buy an option allowing you to purchase a share for $60 in three months, you’ll only exercise it if Apple’s price rises above $60. If the price reaches $70, you could buy at $60 and sell at $70 for a $10 profit. The key question in financial mathematics is: What is this option worth today?
This question led to the Black-Scholes Model, introduced by Fischer Black and Myron Scholes in 1973. Their work transformed finance by offering a mathematical way to calculate option prices. Today, the derivatives market is even larger than the stock market itself.
Historically, derivatives were used by farmers and manufacturers to hedge against price changes. For example, a farmer might agree to sell wheat at a fixed price six months in advance to avoid market uncertainty. This simple idea evolved into a vast global system driven by financial mathematics. Buy our book now
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