179238What is Financial Mathematics?

179238

What is Financial Mathematics?

That mathematics is something that no one likes is a fact. For doing or studying mathematics. However, do you know that they can be combined with finances. Do you know what financial mathematics is?

If you just went blank because you had not heard this term before, know that they are very easy to understand and have multiple uses. Below, we reveal everything you need to know.

What is Financial Mathematics?

At the beginning of this article we have practically defined what financial mathematics is by saying that it was mathematics and finance.

The specific term by which this term is conceptualized is that it is “mathematics applied to finance” . In other words, it is an area within mathematics that studies calculations to know what the value of money is within a financial operation and at a certain time.

That is, try to study through formulas how much the value of money will rise or fall in a financial operation.

As you know, when an operation begins (I understand this as an exchange between present and future capital), money has a value x. But at the end of the operation, that money may have a different value. And that’s where financial math comes in.

What is financial mathematics for?

You know what they are. But it is possible that you still do not visualize the function they have, that is, what they are for. They are a very important part of these operations because, without carrying them out, you can make a probability about the value and profitability of the product in which you are going to invest.

Therefore, the uses of financial mathematics are in bonds, loans, deposits, shares… Any product that requires a capital investment and a long-term result to know if it is beneficial or not.

Its function is really to analyze that product and the results that can be obtained. However, even though it uses key elements (capital, time, interest rates…) it is possible that the final result is not correct since there may be other factors that raise or lower the final figure.

Still, it is a risk that is taken, whether with financial mathematics or without it. Therefore, among the tools used are probability, statistics and differential calculus.

Now, something that not many know is that this type of mathematics also has other more day-to-day applications, such as:

Expense control. In the sense that income and expenses are analyzed, seeing which of them can be expendable or not. Thus, there is an optimization of what is earned and what is spent.
Allows you to analyze inflation. In the sense that, by knowing what the real value of money is at different times, you can know how inflation is going to behave. Of course, it is an estimate, since it may or may not be viable.
Prepare amortization tables. Regarding credits, loans, etc. because this helps you plan savings and better manage expenses.

Types of financial mathematics

Within financial mathematics, you must keep in mind that there are two types, some that are in charge of simple operations and others that address complex ones. We detail them in more detail.

Simple financial math

They are those that analyze and study the evolution that a single capital can have. To do this, they control the capital at the beginning and make calculations to know what it will be at the end of that operation.

Within this, the interest you have can be either simple or compound.

Complex mathematics

Unlike the others, here the capital is not unitary, but rather you have more. You can also say that they are different “incomes.”

In this case, they also control the evolution of the different capitals. Furthermore, the analysis can be carried out according to a certain period of time, without a specific one or what would be a perpetual income.

What formulas are used in financial mathematics

Within financial mathematics, as we have told you before, there are a series of basic formulas that professionals work with. These are:

General simple interest formula
The formula would be: