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Introduction.

Very often, when teaching finance, we only present the formula that gives the answer to how to calculate a given number. For teaching the material it is often useful to actually look at the implementation of how the calculation is done in practice.

In this document I am trying to show how some finance algorithms actually are implemented in addition to describing them. The implementation will be in the form of computer subroutines. The actual programming language is not important, but we do need that the algorithms are testable, so I have chosen to use C++as the programming language. C++has other advantages, but that is in a larger setting. I have tried to make the algorithms as ``generic'' as possible, without relying on particularities of any given language, but I have found it necessary to use some algoritms and templates from the new C++library standard. (The Standard Template Library)

Unfortunately, it turned out to be impossible to be completely ``generic,'' in particular when using the term structure of interest rates. In many financial algorithms we need to take present values using the term structure. The problem is that there is a large numbers of ways to actually calculate/approximate/model a term structure. I have therefore hidden this complexity, by defining a class that is just an abstract representation of a term structure, which the various algorithms use. To give a full description of this class would take too long. Companion documents describing various classes for data structuring is available from my homepage.

I will first document the algorithm, and then present code that implements it. Note that I do not make any guarantees about the correctness of the algorithms, these are meant for teaching.

As you will see, this document is by no means complete, but it is being gradually added to as I get time.

This is not a textbook in the underlying theory, for that there are many good alternatives. For most of the material the best textbook to refer to is Hull (1993), since I have used that as a reference, and the notation follows that.


next up previous contents index
Next: Cash flow algoritms. Up: Financial Numerical Recipes. Previous: Contents   Contents   Index
Bernt Arne Odegaard
1999-09-09