Financial Engineering

Tools and Applications

Agenda Program
divider graphic
Prague, NH Hotel Prague
divider graphic
Introduction to Financial Engineering
Building Blocks of Financial Engineering
Analyzing and Using Swap Curves
Volatility Estimation
Option Pricing Models
Monte Carlo Simulation
Constructing Structured Products
Reverse Engineering and Risk Management
The purpose of this seminar is to provide the participants with a state-of-art toolkit for "Financial Engineering" and a good understanding of how these tools can be used to construct - or to decompose - financial structures with the desired risk/return characteristics. We start with a general introduction to "Financial Engineering" and discuss the purposes of using financial engineering in modern finance. We then take a closer look at the "Building Blocks" of financial engineering. We explain the "Generic Risks" (market risk, credit risk etc.) into which all financial products can be decomposed, and we show how these generic risks can be put together into products with almost any desired risk/return profile, using the "Chinese Menu Approach". We review how swap curves can be constructed from available market data and how these curves are used for pricing and risk analysis. We also briefly present the latest state-of-the-art techniques for volatility estimation. Next, we present the tools of financial engineering and explain how these can be used to construct the desired structured products. These tools include cash instruments, swaps, forwards and options. We explain how these instruments can be analyzed and how the risk/return characteristics can be summarized, providing the "Financial Engineer" with the necessary tools to construct instruments in a very powerful and flexible way. The techniques are illustrated by a number of worked examples, where we apply the toolkit to selected financial problems, resulting in some basic structured products. Finally, we present a structured approach to decomposing existing structures into basic building blocks that are easier to analyze for risk management purposes.

Program of the seminar: Financial Engineering

The seminar timetable follows Central European Time (CET).

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

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

Training catalogue in PDF
arrow-up icon