This course introduces and offers practical guidance in the implementation of quantitative methods for the pricing and analysis of derivative securities. We begin with a brief review of key concepts in derivatives pricing: arbitrage, hedging, probability, conditional expectation and risk-neutral valuation. We then show how these ideas can be applied to compute prices and perform risk analysis for derivative securities, concentrating for the most part on tree-based methods and simulation (Monte Carlo) techniques. Participants will gain hands-on experience in analyzing, manipulating and modifying models for a range of derivative instruments, including vanilla and exotic options, swaps and credit derivatives; all modelling will be in an Excel/VBA framework. Participants should have some prior familiarity with options and other derivative securities and be comfortable working in Excel. No previous programming experience or knowledge of VBA is required.
The course is conducted as a workshop in which participants acquire information and develop new skills by working together to complete a series of exercises.
By the end of the course, participants will be able to:
- Explain the relevance of hedging costs and arbitrage to derivatives pricing
- Outline the principles underlying risk-neutral valuation of derivatives
- Construct and implement binomial models for European and American options
- Outline the principles of simulation or Monte Carlo methods
- Construct simulated paths for asset prices
- Use Monte Carlo methods to price European options
- Show how Monte Carlo methods can be extended to price more complex derivatives, including contracts with path-dependent payoffs (e.g. Asian options) and contract on multiple underlying assets
- Options and familiarity with excel, is assumed
Program Level: Advanced
Advance Preparation: Working Knowledge of Excel
Computers and Financial Calculators: Computers
Recommended CPE Credits: 7