Computational Finance [Online Exam] - Desklib

This article discusses topics related to Computational Finance, including fiat currency, cryptocurrency, block chain, smart contracts, fundamental analysis, technical analysis, stock price prediction, machine learning, automatic trading, endogenous and exogenous variables. It also includes a table of contents and questions with answers.

COMPUTATIONAL
FINANCE [ONLINE EXAM]

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................3
c)..................................................................................................................................................3
QUESTION 2..................................................................................................................................4
a)..................................................................................................................................................4
b)..................................................................................................................................................4
c)..................................................................................................................................................5
QUESTION 3..................................................................................................................................5
a)..................................................................................................................................................5
b)..................................................................................................................................................6
c)..................................................................................................................................................6

QUESTION 1
a)
Fiat Currency (FC) is found in physical money or can be represented electronically. It
comprises paper currency, bank notes, coins , bills, etc which I taken into consideration for
trading goods and services. There is main role played by central banks in economy so that
demand and supply of currency can be maintained. This is legal in all countries where as crypto
currency is not found authorized. Cryptocurrency is digitally encrypted , decentralized currency
that is not connected with any of the legal framework. It comprises Bitcoins, Etherium , Litcoin,
ripple and dash which are not backed by any of the government. It does not required
intermediaries to transfer which is needed in fiat currency. There is availability of gold based
cryptocurrency in market . In contrast to this, fiat currency is not backed by any commodity like
gold. In the monetary system gold based currency has larger value which is highly accepted by
all government as compared to fiat and cryptocurrency. The fiat currency of the countru is not
backed by any gold itself where as there is gold standard. In addition to this, gold based
standards are used as reserve which has been usually kept equal to fiat currency. The major
difference between the crypto and fiat currency is extend to issue limit. Crypto’s issuing limit is
restricted whereas fiat currency is has unlimited level of publishing. Crypto currency is
presented by private and public piece of code. In contrast to this, fiat currency is presented is
coins, notes and bills.
b)
There are various advantages of using block chain in cryptocurrency as it helps in
creating balance of trust among various entities.. it allows to execute decentralized structure
and improved security and privacy which helps in declining the cost of the particular procedure.
In addition to this, it can be identified that it as well give ability to have individual control on
data. Immutability can be attained by giving emphasis on the conducting of allowing bitcoin
and other crypto currency so that reducing risk regarding operations.
c)
In order to have smart contract it is essential to develop minimal design so that proper
functioning can be obtained. It provides convenience and feasibility in carrying the cost and
functioning. In addition to this, it is important to give emphasis on minimal design allows to
meet the predetermined objectives in turn higher efficiency in functioning can be derived.

There are various other ways in which it benefits such as easy smart contact with the statement
that is written into code on a block chain. This means that network executes the action when
predetermined action have been met and verified. It provides assistance in gaining speed,
efficiency, accuracy, security, savings, trust and transparency. It can be smart proof by simply
setting rules of upgrading a smart contract and evaluating that policies upgrades that can aid in
achieving simple modifications and improvement. Minimal design should ensures that overall
terms and condition are mentioned in contract so that proper knowledge as well less complexity
can be maintained in turn higher effectiveness and simplicity can be derived.
QUESTION 2
a)
Fundamental Analysis- It is a method of measuring intrinsic value of a security by
critically evaluating related economic and financial factors. Fundamental analysts study anything
that can have an effect on the security's value from macroeconomic factors to microeconomic
factors where the macroeconomic factors are the state of the economy and microeconomic
factors are the effectiveness of the management of the company. The goal of this analysis is to
arrive at a figure through which an investor can compare the security's current price to see if
security is under or overvalued.
Technical Analysis- It is employed to evaluate investments and to identify the trading
opportunities in rends of prices seen on the charts. In contrast to Fundamental Analysis, it
focuses on historical patterns of prices and stock trends. The goal of this analysis to be able to
make profit from trading understanding the market patterns and statistics.
b)
In the stock price prediction statistical analysis and machine learning are largely sued to
have proper accuracy and efficiency. These both approaches are completely distinct from each
other which need to understand for optimizing its benefits and mitigating related threats. In stock
price prediction computers focuses to learn from data so that particular conclusion can be
provided. In against to this, statistical analysis uses raw data and turn into actionable
information by summarizing, analysing and concluding it so that particular prediction can be
exerted in stock market.

Statistical Analysis- Prediction of stock prices using statistics learning is a big challenge.
Some results have been achieved using LTSM models. When the statistical analysis of a stock is
performed, it is very useful to work with the returns and not only with the price.
Machine learning- With the invention of digital computer, it is easy to predict the stock
market prices. The most important technique includes the use of artificial neural networks
(ANNs) and Genetic Algorithms (GA). ANNs are same as the mathematical function
approximators. These networks are referred to as Back propagation networks.
Machine learning is an algorithm that can learn from data without relying on regulations
based programming. In against to this, statistical modelling for predicting future prices of stock
market companies it sets relationship between variables in data in terms of mathematical
equations to get certain response. Methods of statistical analysis is estimation, classifier, data
point, regression, classifications, covariate, etc. Machine learning involves subfield of computer
science and AI for building system to learn and then predict prices.
c)
Support Vector Machine – It is a machine learning technique used in recent studies to
predict the sock prices. This method will predict whether in future the stock prices will be higher
or lower than it is on a given day. In this, forecasting is done by using support vector machine.
As input parameters to the SVM, the investor utilize some well known stock technical indicators.
Regression – It is the analysis of two different variables to define a single relationship
which is very useful method for both technical and quantitative analysis in financial markets.
Plotting the prices of stock on a normal distribution of bell curve that can help traders to see
when the stock is overbought or oversold.
QUESTION 3
a)
There are variety of pros and cons of automatic trading which need to be taken into
consideration for gaining higher knowledge. Emotions can be avoided and trading plans can
easily implemented. Testing algorithm on historical demo account in prior launching into live
trading. Consistency is achieved by trading the plan and that is why trading hazards arising

from ignoring the rules are neglected. Users can trade multiple accounts or multiple strategies
so that risk is spread over different instruments and hedging against losing positions can be
utilized. On the other side there are various disadvantages of automated trading system which
includes occurrence of discrepancy between theoretical trade and components that turn it in
real transaction. This can result into real losses. Monitoring can not be fully neglected as the
trading is exerted on automatic basis. There is possibilities of mechanical failure, power cuts,
computer crashes and loss of connection that can outcome in missing or duplication of orders .
For example - When traders seek for over optimization of plan of action , trading design
produced are reliable living commerce which can create negative influence regarding the same.
b)
In order to predict the stock prices machine learning is widely taken into consideration
for gaining accuracy and efficiency. Predicting is tough activity which requires deeper
knowledge and effectiveness as it includes psychological , rational, and irrational behaviour.
The reason behind having such deeper emphasis is to get the proper knowledge that can be
attained by focusing on mentioned aspects which play important role in making stock prices
volatile.
It can be done properly by using machine learning as it is most efficient method of
conducting data analysis in accurate manner as it is part of artificial intelligence. This is exerted
by using machine learning techniques like linear regression and kNN to evaluate that how
stock market functions by concentrating on its ups and downs.
c)
Endogenous are independent variable whose value is determined by outside model
which is completely opposite of the exogenous. The reason behind it is concerned with it is that
exogenous variable can have an impact on endogenous factor as it value is determined by the
model. These both are crucial in contributing in machine learning for predicting prices. These
is because ML technique is usually applied to predict the stock price for the future days with
higher accuracy. In machine learning endogenous and exogenous are basically used as that
helps in understanding relationship among variables. It helps in identifying the problems which
can create risk in respect of prevailing prices. For making prediction endogenous helps in
identifying independent variables which can affect the stock prices. On the other side
exogenous provides aid in making evaluation of relatable factors which can influence price.

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