A newer version of this course is available here:
Introduction to Financial Engineering and Risk Management
We hope that students who complete the course and the prerequisite course (FE & RM Part I) will have a good understanding of the "rocket science" behind financial engineering. But perhaps more importantly, we hope they will also understand the limitations of this theory in practice and why financial models should always be treated with a healthy degree of skepticism.
Syllabus
WEEK 1
Mean-Variance Analysis and CAPM
Problem formulation and solution; the efficient frontier; including the risk-free asset; the Capital Asset Pricing Model (CAPM);implications of CAPM: α, β, security and capital market lines
WEEK 2
Practical Issues in Implementing Mean Variance
Problems with mean-variance analysis; ETFs and leveraged ETFs; VaR and CVaR for asset allocation; survivorship bias, performance evaluation and other statistical pitfalls.
WEEK 3
Equity Derivatives in Practice: Part I
Problems with mean-variance analysis; ETFs and leveraged ETFs; VaR and CVaR for asset allocation; survivorship bias, performance evaluation and other statistical pitfalls.
WEEK 4
Equity Derivatives in Practice: Part II
More about Black-Scholes, the Greeks and delta-hedging; the volatility surface; pricing derivatives using the volatility surface; model calibration.
WEEK 5
Credit Derivatives and Structured Products
Mechanics and pricing of CDOs; exotic structured credit securities including CDO-squared’s and CDO-cubed’s. Risk management of these products and their role in the financial crisis.
WEEK 6
Other Applications of Financial Engineering
Real options; energy and commodities modeling; algorithmic trading.
WEEK 7
Background Material