MScMCF 2016

ADMISSIONS EXERCISE
MSc in Mathematical and Computational Finance
For entry 2016

The questions are based on Linear Algebra, Calculus, Probability, Partial

Differential Equations, and Algorithms. If you are still studying for a degree and are yet to take or complete courses in these areas, please indicate
so here. Please specify the titles and dates of courses which you are due
to take/are still taking.
You should attempt all questions and show all working.
Stating the answers without showing how they were obtained will not attract credit.

Statement of authenticity
Please sign and return the following statement together with the solutions. Your application
will not be considered without it.

I certify that the work I am submitting here is entirely my own and unaided
work.
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Date

2016

Linear algebra and calculus

1. (a) Let T : R3 R3 be a linear transformation. Prove the equivalence of the
following statements.
(i) R3 = ker(T ) im(T );
(ii) ker(T ) = ker(T 2 );
(iii) im(T ) = im(T 2 ).
(We write R3 = ker(T ) im(T ) if, for all v R3 , there exists x ker(T ) and
y im(T ) such that v = x + y, and ker(T ) im(T ) = {0}.)
(b) Magical squares are 3 by 3 matrices with the following properties: the sum of all
numbers in each row, and in each column, and in each diagonal is equal. This
number is called the magical number. For example

4 3 8
9 5 1
2 7 6
is a magical square, and the magical number is 15.
(i) Prove that the set of magical squares forms a vector space with the usual
matrix addition and scalar-matrix product.
(ii) Find a basis of the vector space of magical squares and determine its dimension.

2. (a) Evaluate the following integrals, indicating your working:

Z
(i)

5 xs

x e dx,
Z

(ii)

123

(iii)

sin

Z
(x)dx, (iv)

dx
,
x .
dt
1 + et

x3

R x2 /2
2
(b) (i) Find the second derivatives of f (x) = ext /2 dt and
R x2 /2
2
2
g(x) = e(x +1)t dt.
(ii) Derive the solution of the ordinary differential equation
d2 y
= f (x),
dx2

x > 0,

in the form

y(0) = 0,
Z

y(x) =

dy
(0) = 0,
dx

h(t)dt,
0

for a function h which you should determine in a simple form.

2016

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Partial Differential Equations

3. Consider the heat equation
u
2u
.
=
t
x2

(a) Show that if u(x, t) = t () where = x/ t and is a constant, then ()

satisfies the ordinary differential equation
1
0 = 00 ,
2
(where 0 d/d).
(b) Show that
Z

u(x, t)dx =

t ()dx

is independent of t only if =

12 .

Further, show that if = 12 then

1
C = 0
2
where C is an arbitrary constant.
(c) From this last ordinary differential equation, and assuming C = 0, deduce that
A
2
u(x, t) = ex /4t
t
is a solution of the heat equation (here A is an arbitrary constant).
(d) Show that as t tends to zero from above,
1
2
lim ex /4t = 0 for x 6= 0
t

t0+

and that for all t > 0

1
2
ex /4t dx = B
t

2
where B is a (finite) constant. Given that ex dx = , find B.
(e) What physical and/or probabilistic interpretation might one give to this solution
u(x, t)?

2016

Probability
4. A group of n players is divided into two teams (a red and a blue team) according to
the following procedure.
First a number X is chosen randomly form the set {1, 2, . . . , n 1}, with all values
equally likely. Then X of the n players are chosen to form the red team, with all
possible sets of size X equally likely. The remaining n X players form the blue
team.
(a) Find the mean of the size of the red team.
Consider one particular player, called Player A.
(b) Find the probability that the team containing Player A has size k for k =
1, 2, . . . , n 1.
(c) Find the mean of the size of the team containing Player A.
After the teams have been chosen, each team selects a captain, who is equally
likely to be any member of that team.
(d) Find the conditional distribution of the size of the team containing Player A,
given that Player A is the captain.

2016

Turn Over

5. For k, > 0, the Gamma (k, ) distribution is defined by the following density function
(
1
xk1 ex/ if x 0,
k (k)
fk, (x) =
0
if x < 0,
where the function : (0, ] R is defined as follows:
Z
(z) =
et tz1 dt.
0

(a) Let X Gamma(k1 , ) and Y Gamma(k2 , ) be independent random variables

for some k1 , k2 , > 0. Show that (X+Y ) Gamma(k1 +k2 , ). [You may assume
without proof that
Z 1
(k)(m)
(1 x)k1 xm1 dx =
(k + m)
0
for k, m > 0.]
P
(b) Derive the distribution of ni=1 Xi where Xi Gamma(ki , ) for i = 1, . . . , n are
independent random variables for some k1 , . . . , kn , > 0.
(c) For > 0 and n = 1, 2, . . . , let the random variable Zn be defined as
Un E[Un ]
Zn = p
,
Var[Un ]
where Un Gamma(n, ). Using part (a), part (b) and the Central Limit Theorem (or otherwise) show that Zn converges in distribution as n . Specify
the limiting distribution.
[You may assume without proof that the Gamma(k, ) distribution has finite first and
second moments for k, > 0.]

2016

Algorithms
6. This is the pseudo-code of a recursive algorithm (a routine calling itself) calculating
the n!, where n is assumed to be a positive integer:
function VAL=factorial(N)
if N=1 then
VAL=1
else
VAL=N*factorial(N-1)
end if
return VAL
end function
The pseudo-code of a non-recursive implementation could look like this
function VAL=factorial(N)
VAL=1
for I=1 to N
VAL=VAL*I
end for
return VAL
end function
(a) Write a pseudo-code for a recursive function fibonacci(N) that takes a positive
integer N as input argument and returns the N th Fibonacci number f (N ), where
f (1) = f (2) = 1 and f (N ) = f (N 1) + f (N 2) for N > 2.
(b) Write a pseudo-code for a non-recursive version of fibonacci(N).
(c) Assuming that the computational cost of adding two integers is one unit, estimate
the total computational cost of the function in part (a) and the function in part
(b) in terms of N.

2016

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