Course 2021-2022 a.y.

20245 - ADVANCED DERIVATIVES

Department of Finance

Course taught in English
Go to class group/s: 31
CLMG (6 credits - I sem. - OP  |  12 credits SECS-S/06) - M (6 credits - I sem. - OP  |  SECS-S/06) - IM (6 credits - I sem. - OP  |  SECS-S/06) - MM (6 credits - I sem. - OP  |  SECS-S/06) - AFC (6 credits - I sem. - OP  |  SECS-S/06) - CLELI (6 credits - I sem. - OP  |  SECS-S/06) - ACME (6 credits - I sem. - OP  |  SECS-S/06) - DES-ESS (6 credits - I sem. - OP  |  SECS-S/06) - EMIT (6 credits - I sem. - OP  |  SECS-S/06) - GIO (6 credits - I sem. - OP  |  SECS-S/06) - DSBA (6 credits - I sem. - OP  |  SECS-S/06) - PPA (6 credits - I sem. - OP  |  SECS-S/06) - FIN (6 credits - I sem. - OP  |  SECS-S/06)
Course Director:
CLAUDIO TEBALDI

Classes: 31 (I sem.)
Instructors:
Class 31: CLAUDIO TEBALDI


Suggested background knowledge

Knowledge of basic calculus and statistics is recommended

Mission & Content Summary

MISSION

The course is aimed at gaining a more advanced knowledge of financial derivatives. In the first half of the course the basic principles of no arbitrage valuation are bridged with the trading practices of plain vanilla options and market volatility estimation and pricing. A central role is played by the explanation of the procedure which is currently applied to build a Volatility Index using a portfolio of quoted options. The notion of implied volatility surface and their dynamical evolution is introduced analyzing the class of local volatility market models. The second half of the course focuses on the Heston Stochastic Volatility Model (HSVM). A general pricing methodology for plain vanilla and exotic contracts are discussed. Then the HSVM is used to illustrate some practical applications of financial derivatives in investment banking and in the asset management industry. Computer sessions complement classroom activities.

CONTENT SUMMARY

  • From theory to practice: pricing and trading option contracts.
  • Market expectations, implied volatility and the volatility index.
  • Local volatility modeling.
  • The limits of the Black-Scholes model: stochastic volatility.
  • Pricing in stochastic volatility models: a stochastic calculus approach.
  • The Heston Stochastic Volatility Model (HSVM).
  • Closed-form formulas in the HSVM Direct modelling of implied volatility evolution.

Intended Learning Outcomes (ILO)

KNOWLEDGE AND UNDERSTANDING

At the end of the course student will be able to...
  • Analyze real market situations and select best derivative hedging and valuation policies.

APPLYING KNOWLEDGE AND UNDERSTANDING

At the end of the course student will be able to...
  • Work out a formal quantitative valuation approach to the use of derivative products to asset management and general analysis of contingent claims market prices.

Teaching methods

  • Face-to-face lectures
  • Online lectures
  • Group assignments

DETAILS

Group assignment is necessary to improve the problem solving abilities of the students.


Assessment methods

  Continuous assessment Partial exams General exam
  • Written individual exam (traditional/online)
   x x
  • Group assignment (report, exercise, presentation, project work etc.)
 x    

ATTENDING STUDENTS

The written exam corresponds to a typical assessment that is carried out during a job market interview for potential enrollment in a quant group of a major investment bank.  The written exam includes multiple-choice questions to verify quantitative knowledge of basic PDE calculus as applied by quants.

 

The optional group work is an effective test to review the ability to work out a valuation procedure relying on applied stochastic calculus, coding, and financial analysis.

 

Group assignment improves the problem-solving abilities and simultaneously lowers the risk implicit in a grade uniquely determined by a final closed book written exam.

 


NOT ATTENDING STUDENTS

Final written exam.

 

The written exam corresponds to a typical assessment that is carried out during a job market interview for potential enrollment in a quant group of a major investment bank.  The written exam includes multiple-choice questions to verify quantitative knowledge of basic PDE calculus as applied by quants.


Teaching materials


ATTENDING AND NOT ATTENDING STUDENTS

Lecture Notes and Slides available on E-learning.

Further reading, we suggest a classical text-book on advanced option pricing:

  • J. GATHERAL, The Volatility Surface: A Practitioner’s Guide, Wiley, 2006.
Last change 21/07/2021 11:10