Advanced Topics in Derivative Pricing

Description

In this course, you will :

• discusses derivative pricing issues
• understand and apply the Black-Scholes model to calculate Greeks, which measure the sensitivity of option value to variables such as underlying asset price, volatility, and time to maturity Greeks are important in risk management and hedging, and they are frequently used to calculate portfolio value change.
• Risk management of derivatives portfolios is examined from two perspectives: the Greek approach and scenario analysis.
• The second module explains how implied volatility links the theoretical price of an option to the real market price.
• Discuss volatility surface pricing as well as explanations for volatility smile and skew, which are common in real-world markets.
• topics in credit derivatives and structured products, with a focus on Credit Debit Obligation (CDO), which played a significant role in the previous financial crisis beginning in 2007.
• CDO definition, simple and synthetic CDO versions, and CDO portfolios are all covered.

Syllabus :

1. Equity Derivatives in Practice

• Review of the Binomial Model for Option Pricing
• The Black-Scholes Model
• The Greeks: Delta
• The Greeks: Gamma
• The Greeks: Vega 
• The Greeks: Theta 
• Risk-Management of Derivatives Portfolios: Greeks Approach
• Risk-Management of Derivatives Portfolios: Scenario Analysis
• Delta-Hedging
• Beyond Black-Scholes: Implied Volatility 
• Beyond Black-Scholes: Volatility Surface 
• The Volatility Surface in Action
• Why is There a Skew?
• The Leverage Effect
• What the Volatility Surface Tells Us
• Deriving the Marginal Risk-Neutral Distribution Using Volatility Surface
• Pricing Derivatives Using the Volatility Surface
• Pricing a Range Accrual

2. Review and Assignment for Equity Derivatives

 

3. Credit Derivatives and Structured Products

• Structured Credit: CDOs and Beyond
• The Gaussian Copula Model
• Computing the Portfolio Loss Distribution
• Observations from the 1-Period CDO Model
• The Mechanics of a “Synthetic” CDO Tranche
• Fair Value of Premium & Default Leg 
• Fair Value of CDO Tranche
• Cash and Synthetic CDOs
• Pricing and Risk Management of CDO Portfolios
• Challenges in Risk Management of Structured Credit Portfolios 
• A Brief Aside on Copulas 
• CDO-Squared's and Beyond

 

4. Other Applications of Financial Engineering

• Real Options
• Valuation of Natural Gas and Electricity Related Options 
• Valuation of Natural Gas and Electricity Related Options 
• Real Options in Excel

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