FIE446 Financial Engineering

• Topics

  • principles of derivatives pricing;
  • principles of Monte Carlo simulation;
  • building the risk-free discount curve;
  • pricing of Exotic options;
  • pricing of Bermudan options;
  • pricing of interest rate derivatives.

• Learning outcome

  This course provides students with the principals of derivatives pricing using Monte-Carlo simulation. This course is related but different to ECO423 - Principles of Derivates Pricing and Risk Management and FIE425 - Derivates and Risk Management. Contrary to these courses Financial Engineering's primary focus is on the pricing of interest rate derivatives using Monte-Carlo techniques.

  After completing this course successfully the student will have the ability to:

  Knowledge:

  • recall the principles of derivatives pricing and Monte Carlo techniques;

  Skills:

  • bootstrap a discount curve from actively traded financial instruments;
  • price Exotic and Bermudan options by means of Monte Carlo simulation;
  • implement and simulate a Libor Market Model;
  • calibrate a Libor Market Model to interest rate caps;
  • price interest rate derivatives with the Libor Market Model.

  General competence:

  • use the skills obtained to identify and analyze problems within financial engineering

• Teaching

  This course is taught using a combination of regular lectures and examples. The lectures are aimed at providing the core information about the principles of financial engineering while the lecture examples shall help to comprehend and deepen the understanding of the key ideas of the lecture. The examples shall be worked out and implemented in R by each student individually. To encourage students to solve all the examples on their own there will be no code snippets made available by the lecturer; only the solutions.

• Required prerequisites

  Successful completion of FIE450 "Programming and Applications in Finance" or a similar programming course.

• Compulsory Activity

  Students have to successfully complete the lecture examples.

• Assessment

  The final grade is based on a portfolio assessment consisting of class participation (approximately 40%) and a group assignment (approximately 60%). One grade is given for the entire portfolio.

  Class participation:

  Consists of the correct implementation of the many problems during the course. Students are randomly selected each lecture to show and explain their implementations. Class participation is an individual effort.

  Group assignment:

  The group assignment needs to be done in groups. It has an R-code as its delivery and needs to be submitted electronically. The group assignment needs to be in English.

  As the assessment in this course by its nature cannot be re-examined, the grades awarded may not be appealed.

• Grading Scale

  Grading scale: A-F

• Computer tools

  Laptop with R installed on it.

• Literature

  • Lecture notes "Financial Engineering"
  • Emmanuel Paradies, "R for Beginners", available on cran.r-project.org
  • Longhow Lam, "An Introduction to R", available on cran.r-project.org
  • Paul Glasserman, "Title: Monte Carlo Methods in Financial Engineering", Springer, 2004
  • Damino Brigo and Fabio Mercurio, "Title: Interest Rate Models - Theory and Practice", Springer, 2006
  • John C. Hull, "Options, Futures and Other Derivatives", Pearson Prentice Hall, 2006