20245 - ADVANCED DERIVATIVES
Course taught in English
Go to class group/s: 31
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.
- 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.
- Analyze real market situations and select best derivative hedging and valuation policies.
- Work out a formal quantitative valuation approach to the use of derivative products to asset management and general analysis of contingent claims market prices.
- Face-to-face lectures
- Online lectures
- Group assignments
Group assignment is necessary to improve the problem solving abilities of the students.
|Continuous assessment||Partial exams||General exam|
Partial assignments and group assignment improve the problem solving and the efficiency of the grade assessment and lower the risk of a full final written exam.
Final written exam.
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.