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MS&E 345  INTRODUCTION TO FINANCIAL ENGINEERING  Stanford Study Resources
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 JIM PRIMBS
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345SyllSched2010
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
MS&E 345 Advanced Topics in Financial Engineering Winter, 2010 Professor: Jim Primbs: OH MW 10:1511:30am, 444 Terman Class Location and Time: 380 380W, MW 9:0010:15am Course Assistant: Gerald Teng Class Description: This course covers the fundamental p

13Hedging4
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Hedging Primbs, MS&E 345 1 Basic Idea Hedging under Ito Processes Hedging Poisson Jumps Complete vs. Incomplete markets Delta and DeltaGamma hedges Greeks and Taylor expansions Complications with Hedging Primbs, MS&E 345 2 Hedging Hedging is about the re

11termstruc(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Interest Rate Derivatives Primbs, MS&E 345 1 Parameterizing the linear pricing functional Single factor models, etc. HeathJarrowMorton Primbs, MS&E 345 2 The Big Picture Derivative pricing is nothing more than fitting data points with a linear function.

10applications4(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
More Applications of Linear Pricing Primbs, MS&E 345 1 Exchange one asset for another Futures, forwards, forward rates, and swap rates Black's model with stochastic interest rates A generalization of BlackScholes Interest rate derivatives Bond options Ca

09Extensions7(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Extending the Linear Functional Form Primbs, MS&E 345 1 Change of numeraire Martingales and equivalent martingale measures Random interest rates Risk neutral worlds, rates of return, and market price of risk Where is the pde hiding now? Time to think. Pri

08Exotics3(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Applications of the Linear Functional Form: Pricing Exotics Primbs, MS&E 345 1 Black Scholes Dividends Early cash flows Digitals Exotics Asians Barrier Lookbacks American Digitals Primbs, MS&E 345 2 The BlackScholes formula: This time we use risk neutral

07Linear2(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
The Linear Functional Form of Arbitrage Primbs, MS&E 345 1 The Big Picture The basic argument What linear functionals look like Linear Pricing Interpretation as state prices A first step toward risk neutrality Girsanov's Theorem Summary Primbs, MS&E 345 2

06RettoLin(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
From the Return Form to the Linear Functional Form of Arbitrage Primbs, MS&E 345 1 Pricing Theory: Return form (pdes) Linear function form (risk neutral) Optimization Primbs, MS&E 345 2 Pricing Theory: Return form (pdes) Linear function form (risk neutral

05Interest(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Applications of the Return Form of Arbitrage Pricing: Interest Rate Derivatives Primbs, MS&E 345 1 Interest Rate Derivatives Basics Single Factor Short Rate Models Multi Factor Models HeathJarrowMorton Defaultable Bonds Primbs, MS&E 345 2 Basic Quantiti

04newpde(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Applications of the Return Form of Arbitrage Pricing: Equity Derivatives Primbs, MS&E 345 1 Deriving Equations for Derivative Assets: Three step algorithm: (1) Derive factor models for returns of tradable assets. (often involves Ito's lemma.) (2) Apply ab

03ReturnFormP(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
The Return Form of Arbitrage Pricing Primbs, MS&E345 1 Pricing Theory: Return form (pdes) Linear function form (risk neutral) Optimization Primbs, MS&E345 2 Pricing Theory: Returns and Factor Models Return form (pdes) Relationships between returns of asse

02BlackScholes(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
A First Look at the BlackScholes Equation Primbs, MS&E 345 1 Background: Derivative Security: A derivative (or derivative security) is a financial instrument whose value depends on the values of other, more basic underlying variables. ([Hull, 1999]). Exa

01Math(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
Mathematical Preliminaries Primbs, MS&E 345 1 Math Preliminaries: Our first order of business is to develop mathematical models of asset prices and random factors. For most of this course, we will model prices as continuous time stochastic processes and s

00Intro(f)
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
MS&E 345 Advanced Topics in Financial Engineering Jim Primbs Stanford University Winter, 2010 Primbs, MS&E345 1 Course Facts Room and Time: 380380W, MW 9:0010:15. Office hours: 444 Terman, after class Web page: http:/www.stanford.edu/~japrimbs/msande345

FEbook1MAIN
School: Stanford
Course: INTRODUCTION TO FINANCIAL ENGINEERING
THE FACTOR APPROACH TO DERIVATIVE PRICING The BIG Picture in a James A. Primbs January 20, 2009 LITTLE Book 2 Contents 1 Basic Building Blocks and Stochastic Differential Equation Models 1.1 Brownian Motion and Poisson Processes . . . . . . . . . . . . .