Fin­an­cial En­gin­eer­ing

Course content

The course consists of three parts: The first part covers the type of pricing models that institutions use for valuation and risk management of derivatives. We consider models with stochastic volatility, jumps, and local volatility such as the Heston, Merton, Kou, Bates, Dupire, and SABR models. We also cover how to calibrate these models to volatility surfaces using mostly Fourier inversion techniques. The second part of the course shows how to use simulation to price more complicated derivatives with path-dependent and early-exercise features including the Longstaff-Schwartz LSM method. The third part of the course then shows how to engineer a wide variety of structured products (e.g., capital protection notes, yield enhancement notes, cliquets, reverse cliquets), corporate debt securities (e.g., callable bonds, convertible bonds), volatility derivatives (e.g., variance swaps) etc. The models and methods covered in the course have wide applications across equity, fixed income, credit, FX, and commodity/energy markets.