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Unformatted text preview: NBA–5550: Fixed Income Securities and Interest Rate Options Professor Robert Jarrow, 451 Sage Hall Fall 2010 Monday/Wednesday sec 1: 10:10 – 11:25 a.m. sec 2: 1:25 – 2:40 p.m. sec 3: 2:55 – 4:10 p.m. room B06 room B06 room B06 Description: The purpose of this course is to study the pricing and hedging of fixed income securities (e.g. callable coupon bonds) and interest rate options (e.g., swaps, caps, floors, FRAs) – both the economics and mathematics. To the extent that there is time, credit derivatives (e.g. default swaps) will also be discussed. This course emphasizes theory. Institutional details and computer implementation of the theory are also discussed. Furthermore, given the importance of models in financial markets, as a second theme this course will emphasize the “art” of using models in financial markets. Pre-requisite: MBA Core courses (Managerial Finance) and (Statistics for Management) or permission of the instructor. Two-track Course: Given the technical nature of the course material, there will be two different ways in which a student can take this course. One is for the technically inclined student (e.g. MEng), and the second is for the generalist (e.g. traditional MBA). Although both tracks will attend the same lectures, the knowledge mastered in the two distinct tracks will be different. Technical Track: The technically inclined student can take the course for a letter grade. Grade performance will be determined by a technical oriented exam, emphasizing the ability to compute prices and hedges for various interest rate derivatives. Generalist Track: The generalist can take the course for a S/U. Grade performance will be determined by a general knowledge exam, emphasizing the economics of fixed income securities. Problem Sets: The problem sets are designed for the technical track. Mid-semester, a problem set will be available to gauge understanding of the class material. This problem set is for self- 2 study and will not be graded. At various times during the course lectures, additional homework assignments will be provided. No homework will be graded. Exam: The course grade (letter or S/U – depending upon the track selected) will depend solely on the final exam given on Thursday Dec. 9, 3:00 –4:30 p.m. in rooms B08, B09 and B11. Closed book, one sheet of formulas allowed. The generalist track will have an economics focused test. The technical track will have a computational focused test. Both exams are designed such that any student who attends class and does the assigned readings will obtain an A or S, depending upon the track selected. Class participation: Class participation is important to understanding the material. Lectures will often provide information not in the class handouts. Office Hours: 12:00 – 1:00 p.m. Monday and Wednesday. Required Text: R. Jarrow, 2002, Modeling Fixed Income Securities and Interest Rate Options, Stanford University Press. Recommended Text: R. Jarrow and S. Turnbull, 2000, 2nd edition, Derivative Securities, Southwestern Publishers, Cleveland. COURSE OUTLINE
The following topics represent lectures. These lectures are on the course web page, other lectures will be provided as the course proceeds.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Overview Traded Securities Classical Approach The Term Structure of Interest Rates Evolution of T.S.I.R. Expectations Hypothesis Trading Strategies, Arbitrage Opportunities, Complete Markets Bond Trading Strategies Contingents Claim Valuation—Theory Coupon Bonds Options Forwards and Futures Swaps, Caps, Floors, Swaptions, FRAs Continuous Time Limits Jarrow, Introduction. Jarrow, Chapter 1. Jarrow, Chapter 2. Jarrow, Chapter 3. Jarrow, Chapter 4. Jarrow, Chapter 5. Jarrow, Chapter 6. Jarrow, Chapter 7 (omit Chapter 8). Jarrow, Chapter 9. Jarrow, Chapter 10. Jarrow, Chapter 11. Jarrow, Chapter 12. Jarrow, Chapter 13 (skim chapter 14). Jarrow, Chapter 15. (Jarrow and Turnbull, Chapters 16 and 17.) 15. 16. 17. 18. Forward Rate and Volatility Estimation Option Adjusted Spreads Delta, Gamma Hedging Computer Demonstration Jarrow, Chapter 16. Class Notes to be distributed. Class Notes to be distributed. ...
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