Financial Engineering - Tools and Applications

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Financial Engineering

• What is "Financial Engineering"?
• Purpose of Constructing Synthetic Instruments
  • Yield enhancement, arbitrage/regulatory arbitrage etc.
• The "Chinese Menu" Approach

Building Blocks of Financial Engineering

• Cash Instruments
  • Cash and cash equivalents
  • Money market instruments and bonds
  • Stocks
• Forwards and Swaps
• Options
  • "Vanilla" and "exotics"
  • Interest rate options
• Credit Derivatives

12.00 - 13.00 Lunch

13.00 - 16.30 Analyzing and Using Swap Curves

• The "Par" curve
• Accrual and Yield Conventions
• Bootstrapping the Swap Curve
  • Spot rates
  • Discount factors
  • Using FRAs, deposit futures and par swaps
  • Convexity adjustment
• Forward Rates
  • Deriving forward rates from the spot curve
  • Pricing FRAs and other forward contracts
• Pricing Swaps
  • Standard swaps
  • Amortizing and accreting swaps
  • Forward starting swaps
  • Moving the spread from fixed to floating side
  • Pricing currency swaps
• Examples and Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Option Pricing Models

• Models for Stock Options (B&S + CRR)
• Models for Interest Rate Options
  • Black
  • BDT, Hull-White etc.
• Volatility Estimation and Forecasting Techniques
• Examples: Pricing Different Types of Options
• Exercises

Monte Carlo Simulation

• General Introduction to Monte Carlo Simulation
• Monte Carlo Toolkit
  • Generating random numbers
  • Sampling techniques
  • Stochastic differential equations
• Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Constructing Basic Structured Products

• Defining the Required Risk/Return Profile
  • In terms of generic risks
  • In terms of "risk factors"
• Constructing the Product
  • Using the "Chinese Menu Approach"
• Examples of Basic Structured Products
• Exercises

Reverse Engineering and Risk Management

• Decomposing Instruments Into Basic Building Blocks
• Creating a "Delta Vector"
• Cash Flow Mapping and "Key Rate Duration"
• Using Principal Components Analysis to Factor Out Risks
• Calculating Aggregate Risk of Selected Positions
• Using PCA with Monte Carlo Simulation

Evaluation and Termination of the Seminar