Advanced derivatives

Summary

The course covers a wide range of advanced topics in derivatives pricing

Content

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Keywords

Derivatives, volatility, numerical methods

Learning Prerequisites

Required courses

• Derivatives
• Introduction to finance
• Investments
• Stochastic calculus

Learning Outcomes

By the end of the course, the student must be able to:

• Describe properties of asset returns and implied volatility surfaces
• Compare and contrast different methods for modeling implied volatility surfaces including local volatility and stochastic volatility
• Implement the pricing models for any European-style option using the implied distribution.
• Design efficient simulation schemes for pricing options with path-dependent payoffs and early exercise features
• Implement simple finite difference schemes
• Explain the decomposition of structured products into their underlying option components; understand the model risk associated with pricing and hedging exotic derivatives and structured product.
• Demonstrate the model-independent pricing of variance swaps; explain empirical results about volatility risk premiums
• Explain the properties of term structure models and be able to price interest-rate derivatives.

Transversal skills

• Assess one's own level of skill acquisition, and plan their on-going learning goals.
• Take feedback (critique) and respond in an appropriate manner.

Teaching methods

Lectures and exercises

Assessment methods

40% combined weight on assignments given during the course

60% final exam - closed-book

Resources

Bibliography

The main textbook for the course is
Jim Gatheral, The Volatility Surface, Wiley, 2006.

 

In addition, a number of journal articles will be used.

Ressources en bibliothèque

• The Volatility Surface / Gatheral

Moodle Link

• https://go.epfl.ch/FIN-503