A-Eskwadraat - Wiskundesymposium Moneymatics

In this presentation we focus on the pricing of Collateral Default Obligation Tranches. These financial instruments lost a lot of their value during the credit crisis of 2007 and 2008. We show the mathematical model that was used for pricing these instruments and the reason behind the spectacular drop in prices, that surprised many investors.

In this presentation we will give a brief explanation about the different financial markets, the products involved, the mathematical models for stocks and other assets, and the pricing of financial derivatives, like options. We will discuss the issue of robustness and efficiency in pricing financial contracts as part of the Computational Finance research area. Furthermore, we will discuss the uncertainty in the financial models and the impact of this on the pricing equations for options.

We discuss the application of the powerful mathematical theory of stochastic caluclus to problems that arise in option pricing. Practical problems often introduce features which require the development of new mathematical techniques and we will argue that this is the reason that so many mathematicians are now working in this field. As a particular exampe we look at the modelling of discontinuities in asset price processes due to dividend payments and the mathematical theory that is being developed to deal with this.