Delivered at:: HSE Banking Institute

Course type:: Compulsory course

When:: 2 year, 1 module

Instructor

Bulushova, Lidia

Full Syllabus

Abstract

Financial derivatives have been used for hedging in a number of novel ways in recent years. The focus of hedging is changing from minimising variance to minimum value at risk or minimum projected shortfall, which is a specific instance of or an approximation to expected utility maximisation. The so-called HEAVY models, which are used in dynamic hedging strategies, now take into account realised volatility produced from high-frequency data. Additionally, quantile estimators, shrinkage estimators, and enhanced non-parametric estimating are all used in hedging ratio decisions. For better hedging performance, cross-market interactions within the panel data models are also taken into consideration. Although the majority of these new approaches concentrate on forward and futures contracts, similar considerations can also be used to options and other derivatives. Financial markets encompass any location or system that gives buyers and sellers the ability to trade financial instruments, such as bonds, shares, different international currencies, and derivatives. The connection between people with capital to invest and those who need capital is facilitated by financial markets. Financial markets enable participants to transfer risk (often through derivatives) and advance trade in addition to making it feasible to raise funds. Financial market transactions are subject to risk even while regulations and best practises serve as a guidance. The Office of the Controller of the Currency (OCC) advises and assists national banks that participate in financial market activity. Here, we'll be able to look in details about Counterparties, Risks, Derivatives, Securitization and Trading. Financial engineering, which includes quantitative modelling, quantitative coding, and risk managing financial products in compliance with regulations and liquidity requirements, is crucial to the customer-driven derivatives business, delivering customised OTC-contracts and "exotics," and implementing various structured products. Aggressive corporate balance sheet restructuring is an older, less popular application of the term "financial engineering." The use of mathematics in finance is known as mathematical finance. Financial engineering is a discipline that includes both computational finance and mathematical finance, that's why we included some implementation of mathematical models described in this course using Python Programming. The course is designed as a journey through the exciting world of derivatives, where in each lecture students get acquainted with the most commonly used concepts and techniques, grouped by their area of application.

Learning Objectives

The objective of this course is to familiarize the students with the modern methods of analysis and evaluation of standard financial derivatives and with the construction of strategies. The course also pursues the goal of familiarization of students with the limits of applicability of the conventional models and the gaps in their respective derivations along with the presentation of ways of filling these gaps. The course is designed to combine the theory of financial derivative instruments and the practical functional aspects of the of derivatives markets

Expected Learning Outcomes

Identifying the basic types of derivatives: forwards, futures, swaps and options
Identifying main factors affecting the price of the considered instruments and basic techniques leading to no-arbitrage pricing of derivatives with the basic relationships between adjacent instruments
Understanding the methods and principles of the mathematical theory of finance as the foundation for options pricing
Ability to work with the Black-Scholes option pricing model: applicability for the definition of the price and risks of options, as well as its resulted from the underlying assumptions inability to accurately describe the real-world market processes without some amendments
Understanding of the main methodology of derivation of generic models for financial derivative instruments and necessary for their evaluation mathematical machinery

Course Contents

Types of Derivative Instruments and Their Characteristics
Markets and Valuation of Forwards and Futures Contracts
Swaps Markets and Valuation of Swaps Contracts
Options Markets and Valuation of Options Contracts
Introduction to Binomial Trees
The Black–Scholes–Merton Model and Brownian Motion Introduction
Credit Derivatives Markets and Instruments
Uses of Derivatives in Portfolio Management

Assessment Elements

Tests given after every class
Final exam

Interim Assessment

2023/2024 1st module
0.5 * Final exam + 0.5 * Tests given after every class

Bibliography

Recommended Core Bibliography

Hull, J. C. (2017). Options, Futures, and Other Derivatives, Global Edition. [Place of publication not identified]: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1538007
Paul Wilmott. (2013). Paul Wilmott on Quantitative Finance. [N.p.]: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=185503

Recommended Additional Bibliography

Keith Cuthbertson, Dirk Nitzsche, & Niall O’Sullivan. (2019). Derivatives : Theory and Practice. [N.p.]: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=2271231

Master of Finance

Derivatives and Financial Engineering