Course Title: Probability and Optimization Models in Finance

Part A: Course Overview

Course Title: Probability and Optimization Models in Finance

Credit Points: 12.00

Course Code




Learning Mode

Teaching Period(s)


City Campus


145H Mathematical & Geospatial Sciences


Sem 2 2006,
Sem 2 2009,
Sem 2 2011,
Sem 1 2013

Course Coordinator: Dr Sergei Schreider

Course Coordinator Phone: +61 3 9925 3223

Course Coordinator Email:

Course Coordinator Location: 8.9.33

Pre-requisite Courses and Assumed Knowledge and Capabilities

There are no formal pre-requisites to this course however knowledge of basic calculus, probability and statistics is an advantage.

Course Description

This course is constituted from four major components which can be described as follows:

Part 1 Deterministic financial mathematics, concept of interest rate, credits, investments, discounting, present value of financial assets. 

part 2  Stochastic models in finance. Modelling the prices of financial assets. Binomial model, Cox – Ross – Rubinstein model, lognormal model. Modelling of option prices. The Black – Scholes model. 

Part 3 Forming the optimal portfolio. The Markowitz’ portfolio of minimal risk and the Tobin and Markowitz portfolios of maximal efficiency. 

Part 4 Financial market and its models: CAPM and APT, investor’s attitude to risk.

Objectives/Learning Outcomes/Capability Development

This course helps the student to construct appropriate mathematical models for financial and economic applications, and enables them to develop optimal solutions, understand the theory behind the solutions and translate the solutions into directives for action.

On completion of this course students will:
1. learn about of concept of option prices, market risk and decision making under uncertainty and different risk attitudes
2. be able to define and formulate problems in financial mathematics and appreciate their assumptions and limitations;
3. be able to solve problems of financial mathematics using the appropriate techniques and be able to interpret the results obtained; and
4. have an appreciation of extended techniques and of ways on how to expand their knowledge obtained beyond those specified in the course synopsis.

Overview of Learning Activities

The major component of course material will be presented during lecture classes. The directed work on assignments is also an important component of the course.

The learning activities will include 2 hours of lectures addition to assignments . Assignments will be distributed on a regular basis to check your understanding of the material presented in the course.

Overview of Learning Resources

Learning resources consist of the recommended text book, which is available in the RMIT library and bookshop, and a set of on-line learning resources placed on the course website. These resources will include lecture notes for all topics constituting the course, example of problems and assignments with solutions.

Overview of Assessment

The course assessment consists of two assignments and an final exam.

A requirement of the course is that you must achieve at least a passing grade in the exam.