All programmes > Financial Engineering

Financial Engineering (B-KUL-G0Q22A)

6 ECTSEnglish39 Second term
Schoutens Wim |  Leoni Peter (substitute)
POC Master in de actuariële en financiële wetenschappen

Aims

The objectives of this course  are to develop a solid understanding of the current framework for pricing equity derivatives, and to give the mathematical and practical background necessary to apply the various pricing methodologies on the market.

Previous knowledge

Fundamentals of Financial Mathematics probability theory, stochastic processes, statistics.

Is included in these courses of study

Activities

5 ects. Financial Engineering (B-KUL-G0Q22a)

5 ECTSEnglishFormat: Lecture26 Second term
Schoutens Wim |  Leoni Peter (substitute)
POC Master in de actuariële en financiële wetenschappen

Content

The objectives of this course  are to develop a solid understanding of the current framework for pricing equity derivatives, and to give the mathematical and practical background necessary to apply the various pricing methodologies on the market.
 
Prior knowledge of notions concerning discrete and continuous stochastic processes, probability theory and statistics will be useful.
Contents
 
·         Basic Equity Models: This section overviews the Binomial and Black-Scholes model for the pricing of financial derivatives in an equity setting.
·         Shortfalls of the Black-Scholes Model : Problems with the Normal Distribution, the need for stochastic volatility, implied volatility, stylized features of financial returns.
·         An Introduction to Lévy Processes: Definitions, Lévy-Kinthchin representation, properties, examples.
·         Jump Models: Lévy models, Variance Gamma model, risk-neutral modeling - equivalent martingale measures, extensions of the VG model.
·         Stochastic Volatility: Stylized features of volatility, Heston model, Heston with jumps, Lévy models with stochastic volatility.
·         Pricing European Options using Characteristic Functions : characteristic functions, Carr-Madan formula for European options, FFT techniques, characteristic function technique for other payoffs.
·         Basic concepts of calibration, search algorithm, choosing starting values, examples.
·         Monte-Carlo Simulations: Theory, Standard sampling of Heston paths, standard sampling VG paths, advanced sampling methods: Milstein's scheme, series representations, sampling Lévy processes with stochastic volatility paths.
·         Exotic Option Pricing: Pricing European options using Monte-Carlo simulation, variance reduction techniques, pricing American and barrier options by solving PDEs and PIDEs.
·         Miscellaneous: credit risk and interest rate modeling

Course material

References articles and literature:
Bingham, N.H. and Kiesel, R. (1998) Risk-Neutral Valuation. Springer.
Hull, J.C. (2000) Options, Futures and Other Derivatives. Prentice-Hall.
Schoutens, W. (2003) Lévy processes in finance. Wiley.

1 ects. Financial Engineering: Exercises (B-KUL-G0Q23a)

1 ECTSEnglishFormat: Practical13 Second term
Schoutens Wim |  Leoni Peter (substitute)
POC Master in de actuariële en financiële wetenschappen

    Evaluation

    Evaluation: Financial Engineering (B-KUL-G2Q22a)

    Type : Partial or continuous assessment with (final) exam during the examination period
    Description of evaluation : Written, Paper/Project
    Type of questions : Multiple choice, Open questions
    Learning material : Course material

    Explanation


    Features of the evaluation

    * The evaluation consists of:

    • an assignment 
    • an written exam

    * The deadline for the assignment will be determined by the lecturer and communicated via Toledo.

    Determination of the final grade

    * The grades are determined by the lecturer as communicated via Toledo and stated in the examination schedule. The result is calculated and communicated as a whole number on a scale of 20.

    * The final grade is a weighted score and consists of:

    • the assignment : 50% of the final grade
    • the exam: 50% of the final grade

    * If the student does not participate in the assignment and/or the exam, the grades for that part of the evaluation will be a 0-grade within the calculations of the final grade.

    *If the set deadline for the assignment was not respected, the grade for that respective part will be a 0-grade in the final grade, unless the student asked the lecturer to arrange a new deadline. This request needs to be motivated by grave circumstances.

    Second examination opportunity

    * The features of the evaluation and determination of grades are similar to those of the first examination opportunity, as described above.

    Information about retaking exams

    * The features of the evaluation and determination of grades are similar to those of the first examination opportunity