FINANCIAL ENGINEERING

Code: MA471 | L-T-P-C: 3-0-0-6

Prerequistes: MA 372 Stochastic Calculus for Finance

Continuous time financial market models, Black- Scholes model, Black-Scholes PDE and formulas, Risk neutral valuation, change of numeraire, pricing and hedging of contingent claims, Greeks, Implied volatility; Options on futures, European, American and Exotic options. Incomplete markets, market models with stochastic volatility, pricing and hedging in incomplete markets.

nd markets, term-structures of interest rates, bond pricing; Short rate models, martingale models for short rate (Vasicek, Ho-Lee, Cox-Ingersoll-Ross and Hull-White models), multifactor models; Forward rate models, Heath-Jarrow-Morton framework, pricing and hedging under short rate and forward rate models, swaps and caps; LIBOR and Swap market models, caps, swaps, swaptions, calibration and simulation. Introduction to credit risk modeling, credit derivatives, CDS and CDO.

Texts:

1. T. Bjork, Arbitrage Theory in Continuous Time, 2nd ed., Oxford Univ. Press, 2003.
2. J. C. Hull, Options, Futures and Other Derivatives, 7th Edition, Pearson Education/Prentice-Hall of India, 2008.

References:

1. S. Shreve, Stochastic Calculus for Finance, Vol. 2, Springer, 2004.
2. D. Brigo and F. Mercurio, Interest rate models:Theory and Practice, Springer, 2006.
3. N. H. Bingham and R. Kiesel, Risk Neutral Valuation, 2nd ed., Springer, 2004.
4. J.Cvitanic and F. Zapatero, Introduction to the Economics and Mathematics of Financial Markets, Prentice-Hall of India, 2007.
5. M. Musiela and M. Rutkwoski, Martingale Method in Financial Modelling, 2nd ed., Springer, 2005.
6. P. Wilmott, Derivatives: The Theory and Practice of Financial Engineering, Wiley, 1998.