Introduction to Financial Mathematics
R. De Hoe
Notes de cours et résumé de syllabus
Academic Year 2023 - 2024
1
,0) Introduction
2
,1. What is finance?
Finance = concerns obtaining financial resources and allocating them (investments and
placements) through financial decisions.
Fundamental principles:
The time value of money
The trade-off between profitability and risk
2. Financial decisions, arbitrage and financial markets
Value of an asset: determined by its price in a competitive market.
Where such a market exists, costs and revenues should be valued by reference to
prevailing market prices.
When revenues exceed costs, investment or operation will increase the value of the
business or the wealth of the investor.
! Financial decisions are constraint by financial markets and the financial system ! :
Financial markets = places where buyers and sellers trade financial assets.
Primary function: connect lenders (people with excess cash) and borrowers (who need
cash but don’t have it)
Lenders: savers, investors,…
Borrowers: individuals wanting to buy cars, firms wanting to expand, governments
needing to fund public services,…
BUT in reality, two elements can complicate financial decisions:
1. Time
2. Risk
To make financial decisions, two fundamental principles must be taken into account:
1. The time value of money
2. The trade-off between profitability and risk
3
, 1) Notion of interest rate
4
R. De Hoe
Notes de cours et résumé de syllabus
Academic Year 2023 - 2024
1
,0) Introduction
2
,1. What is finance?
Finance = concerns obtaining financial resources and allocating them (investments and
placements) through financial decisions.
Fundamental principles:
The time value of money
The trade-off between profitability and risk
2. Financial decisions, arbitrage and financial markets
Value of an asset: determined by its price in a competitive market.
Where such a market exists, costs and revenues should be valued by reference to
prevailing market prices.
When revenues exceed costs, investment or operation will increase the value of the
business or the wealth of the investor.
! Financial decisions are constraint by financial markets and the financial system ! :
Financial markets = places where buyers and sellers trade financial assets.
Primary function: connect lenders (people with excess cash) and borrowers (who need
cash but don’t have it)
Lenders: savers, investors,…
Borrowers: individuals wanting to buy cars, firms wanting to expand, governments
needing to fund public services,…
BUT in reality, two elements can complicate financial decisions:
1. Time
2. Risk
To make financial decisions, two fundamental principles must be taken into account:
1. The time value of money
2. The trade-off between profitability and risk
3
, 1) Notion of interest rate
4
