FINANCIAL ENGINEERING - II

Code: MA373 | L-T-P-C: 3-0-0-6

Prerequisites: MA372 or equivalent

Continuous time financial market models, Black-Scholes-Merton model, Black-Scholes-Merton equation and formula, dividend paying assets, forwards and futures, risk-neutral valuation of European, American and Exotic derivative securities, change of numeraire, hedging of contingent claims, Greeks, implied volatility, volatility smile; Options on futures; Incomplete markets, stochastic volatility models, pricing and hedging in incomplete markets; Fixed income markets, bonds and interest rates, pricing of fixed income securities, term structure equation; Short rate models, martingale models for short rate (Vasicek, Cox-Ingersoll-Ross, Dothan, Ho-Lee and Hull-White models), multifactor models; Forward rate models, Heath-Jarrow-Morton framework, pricing and hedging under short rate and forward rate models, swaps, caps and floors; LIBOR and swap market models.

Texts:

1. T. Bjork, Arbitrage Theory in Continuous Time, 3rd Ed., Oxford University Press, 2003.
2. S. Shreve, Stochastic Calculus for Finance, Vol. II, Springer, 2004.

References:

1. J. C. Hull, Options, Futures and Other Derivatives, 10th Ed., Pearson, 2018.
2. D. Brigo and F. Mercurio, Interest Rate Models: Theory and Practice, Springer, 2006.
3. N. H. Bingham and R. Kiesel, Risk-Neutral Valuation, 2nd Ed., Springer, 2004.
4. J. Cvitanic and F. Zapatero, Introduction to the Economics and Mathematics of Financial Markets, Prentice-Hall of India, 2007.
5. M. Musiela and M. Rutkwoski, Martingale Method in Financial Modelling, 2nd Ed., Springer, 2005.