Introduction to Financial Mathematics
What is Financial Mathematics? And why we study Financial Mathematics?
A student is trying to guess an unfamiliar question having 5 possible options. What are the chances that the student choose the correct answer?
Since there is 1 correct answer out of 5 possible choices. So, chances of choosing correct answer are 1/5 (20%).
Making Good Decision:
Now, if there is NO negative marking, then it is OK to guess (since there are 20% chances of choosing the correct answer). But, if there is negative marking, then it is folly to guess the answer (since there are 80% chances of choosing the wrong answer).
Why we study Financial Mathematics?
We study Financial Mathematics because we want to make good (financial) decisions in uncertainty.
A company's final account which is made after the financial year ends, is also called Profit or Loss Account, since it is impossible to make money without the risk of losing the money, and similarly, it is impossible to lose money without the chance of making the money. Financial mathematicians investigate markets and work on the objective of making money without the risk of losing it.
"When you can measure what you are speaking about, and express it in numbers, you know something about it; when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science."
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