Home page of Business 35132 (former 439). Prof. Pietro Veronesi
Mathematical Models of Option Pricing and Credit Risk
Course Overview
It is a fact that derivatives' markets have been growing fast in the past decade.
As of December 2010, the total notional of over-the-counter derivatives was $600 trillion,
a 40% increase over its value in December 2006. A similar expansion was registered by
the credit derivatives market, which stood at $30 trillion (notional) at the end of 2010.
The recent sovereign credit crisis has also renewed the need to understand the pricing of
corporate and government bonds with default risk. The recent financial crisis also generated
arge trading opportunities, as the dislocation of capital increased the spreads across the board,
and numerous apparent “almost arbitrage” opportunities appeared 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 design 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 one third of the course is devoted
to formal models of credit risk, with special attention to sovereign credit risk. 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;
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You can contact me by sending your mail at pietro.veronesi@gsb.uchicago.edu
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