Foundations of Computational Finance with MATLAB

ED MCCARTHY is a journalist, prolific finance writer, and MathWorks Certified MATLAB® Associate. His articles have appeared in Bloomberg Wealth Manager, CFA Institute Magazine, Institutional Investor, Financial Planning, Journal of Accountancy, and the Journal of Financial Planning. He is also author of The Financial Advisor's Analytical Toolbox and Fast Forward MBA in Personal Finance.

• Introduction xiiiWhy You Should Read This Book xiiiThe Intended Reader xivWhy MATLAB®? xivHow to Use This Book xviFont Conventions xviAbout the Author xviiMathWorks Information xviiiReferences xviiiPart I MATLAB Conventions and Basic Skills 1Chapter 1 Working with MATLAB® Data 31.1 Introduction 31.2 Arrays 31.2.1 Numerical Arrays 41.2.2 Math Calculations with Scalars,Vectors, and Matrices 101.2.3 Statistical Calculations on Vectors and Matrices 161.2.4 Extracting Values from Numerical Vectors and Matrices 191.2.5 Counting Elements 261.2.6 Sorting Vectors and Matrices 281.2.7 Relational Expressions and Logical Arrays 311.2.8 Dealing with NaNs (Not a Number) 351.2.9 Dealing with Missing Data 391.3 Character Arrays 401.3.1 String Arrays 441.4 Flexible Data Structures 461.4.1 Cell Arrays 471.4.2 Structure (“struct”) Arrays 491.4.3 Tables 51References 60Further Reading 60Chapter 2 Working with Dates and Times 612.1 Introduction 612.2 Finance Background: Why Dates and Times Matter 612.2.1 First Challenge: Day Count Conventions 622.2.2 Second Challenge: Date Formats 632.3 Dates and Times in MATLAB 642.3.1 Datetime Variables 642.3.2 Date Conversions 732.3.3 Date Generation Functions with Serial Number Outputs 792.3.4 Duration Arrays 832.3.5 Calendar Duration Variables 862.3.6 Date Calculations and Operations 892.3.7 Plotting Date Variables Introduction 94References 95Chapter 3 Basic Programming with MATLAB® 973.1 Introduction 973.1.1 Algorithms 101 973.1.2 Go DIY or Use Built-In Code? 983.2 MATLAB Scripts and Functions 993.2.1 Scripts 993.2.2 Developing Functions 1063.2.3 If Statements 1123.2.4 Modular Programming 1153.2.5 User Message Formats 1213.2.6 Testing and Debugging 124References 127Chapter 4 Working with Financial Data 1294.1 Introduction 1294.2 Accessing Financial Data 1294.2.1 Closing Prices versus Adjusted Close Prices for Stocks 1304.2.2 Data Download Examples 1314.2.3 Importing Data Interactively 1334.2.4 Automating Data Imports with a Script 1384.2.5 Automating Data Imports with a Function 1404.2.6 Importing Data Programmatically 1474.3 Working with Spreadsheet Data 1544.3.1 Importing Spreadsheet Data with Import Tool 1544.3.2 Importing Spreadsheet Data Programmatically 1544.4 Data Visualization 1564.4.1 Built-In Plot Functions 1564.4.2 Using the Plot Tools 1584.4.3 Plotting with Commands 1594.4.4 Other Plot Tools 1624.4.5 Built-In Financial Charts 173References 176Part II Financial Calculations with MATLAB 177Chapter 5 The Time Value of Money 1795.1 Introduction 1795.2 Finance Background 1805.2.1 Future Value with Single Cash Flows 1805.2.2 Future Value with Multiple Cash Flows 1855.2.3 Present Value with Single Cash Flows 1875.2.4 Present Value with Multiple Variable Cash Flows 1885.3 MATLAB Time Value of Money Functions 1895.3.1 Future Value of Fixed Periodic Payments 1905.3.2 Future Value of Variable Payments 1915.3.3 Present Value of Fixed Payments 1935.3.4 Present Value of Variable Payments 1945.4 Internal Rate of Return 1975.5 Effective Interest Rates 1985.6 Compound Annual Growth Rate 1985.7 Continuous Interest 2005.8 Loans 200References 202Chapter 6 Bonds 2036.1 Introduction 2036.2 Finance Background 2046.2.1 Bond Classifications 2046.2.2 Bond Terminology 2056.3 MATLAB Bond Functions 2066.3.1 US Treasury Bills 2066.3.2 Bond Valuation Principles 2086.3.3 Calculating Bond Prices 2096.3.4 Calculating Bond Yields 2126.3.5 Calculating a Bond’s Total Return 2146.3.6 Pricing Discount Bonds 2166.4 Bond Analytics 2166.4.1 Interest Rate Risk 2176.4.2 Measuring Rate Sensitivity 2196.4.3 Yield Curves 2276.5 Callable Bonds 229References 231Further Reading 231Chapter 7 Dealing with Uncertainty and Risk 2337.1 Introduction 2337.2 Overview of Financial Risk 2347.3 Data Insights 2347.3.1 Visualizing Data 2357.3.2 Basic Single Series Plots 2377.3.3 Basic Multiple Series Plots 2377.3.4 Adding Plot Customization 2387.3.5 Histograms 2397.3.6 Measures of Central Location 2417.3.7 Measures of Data Dispersion 2437.4 Data Relationships 2497.4.1 Covariance and Correlation 2517.4.2 Correlation Coefficients 2527.5 Creating a Basic Simulation Model 2537.6 Value at Risk (VaR) 258References 261Further Reading 262Chapter 8 Equity Derivatives 2638.1 Introduction 2638.2 Options 2648.2.1 Option Quotes 2658.2.2 Market Mechanics 2668.2.3 Factors in Option Valuation 2678.3 Option Pricing Models 2688.3.1 Arbitrage 2698.3.2 Binomial Option Pricing 2708.3.3 Black-Scholes 2748.4 Options’ Uses 2768.4.1 Hedging 2778.4.2 Speculation and Leverage 2778.4.3 Customizing Payoff Profiles 2788.5 Appendix: Other Types of Derivatives 2798.5.1 Commodity and Energy 2798.5.2 Credit 2798.5.3 Exotic Options 280References 281Further Reading 281Chapter 9 Portfolios 2839.1 Introduction 2839.2 Finance Background 2839.3 Portfolio Optimization 2859.4 MATLAB Portfolio Object 2869.4.1 Object-Oriented Programming (OOP) 2869.4.2 A Basic Example 2879.4.3 Using Data Stored in a TableFormat 294References 296Chapter 10 Regression and Time Series 29710.1 Introduction 29710.2 Basic Regression 29710.2.1 Understanding Least Squares 30010.2.2 Model Notation 30110.2.3 Fitting a Polynomial with polyfit and polyval 30310.2.4 Linear Regression Methods 30510.3 Working with Time Series 30810.3.1 Step 1: Load the Data (Single Series) 30810.3.2 Step 2: Create the FTS Object 30910.3.3 Step 3: Using FTS Tools 311References 314Appendix 1 Sharing Your Work 315A1.1 Introduction 315A1.2 Publishing a Script 316A1.2.1 Publishing with Code Sections 317A1.2.2 futureValueCalc3 319A1.2.3 Formatting Options 321A1.2.4 Working with Live Scripts 322A1.2.5 Editing and Control 325References 326Appendix 2 Reference for Included MATLAB® Functions 327Index 335