Discussion platform for question about the course, exercises, exams etc.
Optional course for MSc and PhD students, advanced undergraduate students.
MSc or PhD studies
This is a "financial engineering" course concentrating mainly on interest rate market derivatives, and the various related ways to approach term structure modeling. The goal is to cover main parts of the relevant theory including several specific models, and at least some of the current practical aspects of derivatives pricing in the interest rate and related markets. During the course we hope to touch topics that are not covered in a typical textbook. For example, at the end fo the course we will revisit the concept of a "risk free" discount curve, how it has changed since the global financial crises of 2007-2008, and how this affects derivatives pricing. The students will get a feel for implementing many of the models using Excel, R or Matlab, using real market data where possible.
After quickly going through some of the most typical concepts and jargon one faces entering the field, we will study and construct the main building blocks of pricing: the discount curve and other relevant curves. Term structure models form the main body of the course: we will go from short rate models through HJM to Libor and swap market models. We will also review some of the main numerical tools from a hands on, applied perspective while we are covering the topics. Time allowing we will cover the basics of the closely related currency and credit derivatives markets.
In more detail, the plan is to cover some but not all of the following topics (not necessarily in this order):
- Quick review of basic rate and bond concepts
- Return decomposition: Carry & rolldown analysis
- Simple sensitivity analysis: Duration, BPV, Convexity
- Main interest rate types and derivatives: payoffs
- Bootstrapping bond and swap rate curves
- One factor short rate models
- Multi-factor short rate models
- Modeling of the instantaneous forward rates: the Heath-Jarrow-Morton framework
- Market models
- Currency markets and basic derivatives
- Credit models and Credit default swaps
- OIS, CSA discounting and the dual curve bootstrapping of swap curve
Lectures, exercise sessions and independent work.
It is highly recommended that you have take a first course in financial mathematics (in discrete time) and are either familiar with stochastic calculus or you are simultaneously taking the course on continuous time financial mathematics. The beginnning of the course will be lower on prerequisites but we will go very fast and at the end of the course will be dealing with quite advanced concepts.
It is good to have some experience in programming but there are no formal prerequisites in this. We will be using Excel, R, and Matlab. While it is not necessary to use Matlab, some of the examples will be using Matlab.