- The aim of the course is to master the techniques of financial engineering for the fixed income instruments, stocks and FX markets, volatility modeling, and interest rate, currency and credit default swaps.
- Students know pricing and features of derivatives securities, key principles of financial markets modeling using Monte Carlo methods.
- Students have the abilities to measure and hedge the different sources of financial risks and to construct structural products.
- Students choose adequate mathematical models for the forecasting prices of financial assets.
- Students understand the principles of decision-making in a derivative markets.
- Students makes calculation on the basis of Monte Carlo methods for security pricing, risk measurement and forecasting.
- Students have skills in modeling and forecasting the volatility using GARCH and Markov Switching.
- Students have skills in modeling and forecasting the dynamics of interest-rate structure.
- Students have skills in modeling and forecasting the stock and FX prices using linear and nonlinear models.
- Students understand principles of interest-rate, FX and CD swaps engineering.
- Students are prepared for taking ethical and reasonable, data-driven decisions on hedging on financial markets, timely and in a persuasive manner.
- Topic 1. Institutional aspects of derivative marketsFutures and options: pricing and risks. Using of derivatives to hedge market risks. Problems of forecasting the prices of financial assets under hedging: volatile volatility, asymmetry, nonlinearity on average. General rules for constructing a hedged asset.
- Topic 2. Monte Carlo methods in financial engineeringThe principles of imitation prediction. Construction of the simulation model. Algorithmization in R. The model of a random walk with constant volatility and its possibilities for hedging and speculation. The effectiveness of martingale and anti-martingale strategies. The use of Monte Carlo methods in predicting the ARIMA model with constant volatility.
- Topic 3. Volatility engineeringMeasuring volatility. Historical and implied volatility. Volatility models: ARCH, GARCH, varieties of GARCH. Clustering of volatility. Volatility spillover. Nonlinear volatility models: threshold model and regime switching model. Properties of volatility in the design of hedge assets.
- Topic 4. Fixed income markets engineeringSpot and forward interest rates. Fixed income instruments pricing: yield to maturity, duration and convexity. Measurement of interest rate risk. Engineering of fixed income instruments portfolio. Estimation the impact of the default risk growth on VAR of the bond portfolio.
- Topic 5. Stock and FX markets engineeringNonlinearity in mean in the dynamics of stock and FX prices. Reasons for the emergence of temporary trends in prices. Threshold models. Regime switching models. Structural breaks. Price’s forecasting using nonlinear models. The influence of secular stagnation on world stock market indices. Modeling risks of the stocks and FX portfolio.
- Topic 6. Interest-rate, FX and CD swaps engineeringModeling the time structure of interest rates. Impact of expectations on the yield curve. Models of dynamics of interest rate. Uncertainty in the dynamics of interest rates. The role of monetary policy in the engineering of the bond market. Interest, currency and CD swaps for managing risks.
- Interim assessment (1 module)0.5 * Final exam + 0.1 * In-class activitity + 0.2 * Individual project + 0.2 * Midterm
- Brandimarte, P. (2014). Handbook in Monte Carlo Simulation : Applications in Financial Engineering, Risk Management, and Economics. Hoboken, New Jersey: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=800911
- Kosowski, R., & Neftci, S. N. (2015). Principles of Financial Engineering (Vol. Third edition). Amsterdam: Academic Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=516142