Home page of Business 35132 (former 439). Prof. Pietro Veronesi
Financial Engineering: Mathematical Models of Option Pricing
Course Overview
It is a fact that derivatives' markets have been growing fast in the past decade.
As of December 2008, the total notional of over-the-counter derivatives was $592 trillion,
a 40% increase over its value in December 2006. A similar expansion was registered by
the credit derivatives market, which stood at $42 trillion (notional) at the end of 2008.
Although both the global derivatives market and the credit derivatives market experienced
a decline during the 2008 financial crisis, there is little doubt that they will play a
major role in the future. For instance, likely the largely unregulated credit derivatives
market will become more regulated, possibly moving to a regulated exchange, but their
function as providing insurance on default is too important for it to disappear. The
current financial crisis has generated also large trading opportunities, as the dislocation
of capital increased the spreads across the board, and numerous apparent “almost arbitrage”
opportunities appear available to whoever has capital to invest and the expertise to capture
them.
This course covers the analytical and numerical methodologies applied by hedge funds and
derivatives trading desks to price complex derivative securities and devise arbitrage
strategies. We will apply these methodologies to several case studies, whose topics range
from relative value trades in equity options and fixed income instruments, to the pricing
of convertible securities using numerical methods. About half of the course is devoted to
credit risk and securitization. Numerous profitable opportunities are now available as the
government tries to jump start the securitization market again. We will cover case analysis
that range from the pricing and hedging of credit derivatives, such as credit default swaps
(CDS), to the valuation and risk analysis of cash and synthetic collateralized debt
obligations (CDO). We will also discuss and analyze the credit market indices such as
TRAC-X.
In a world of increasingly higher sophistication, the valuation of complex derivative
securities and the design of arbitrage strategies require the understanding and
application of advanced models of option pricing, and their application to real data.
This course emphasizes both, and provides students with real world problems to solve.
Important Clarification on Prerequisites:
The following classes are strict prerequisites: Business 35000 (or 35901), and 35100.
If you do not meet the strict prerequisites, SEND ME AN E-MAIL with a detailed explanation on why you think you have the necessary skills to take B35132 anyway.
To know more about the course, you can download a PDF file with the Course Syllabus
The
Teaching Notes;
The
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The
Computer Files;
The
Assignments;
Data
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You can contact me by sending your mail at pietro.veronesi@gsb.uchicago.edu
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