Tools for Modeling and Data Analysis in Finance/Asset Pricing

Practical Aspects of Risk, Utility, and Derivative Valuation
Lecturer: Glenn J. Satty

1. Utility and Behavior: practical examples of why rational people behave differently whether or not they have the same information, and how utility and behavior impact financial markets and pricing of financial instruments.

2. Fundamental Intuition behind Derivative Pricing: reducing the Black-Scholes equation and its solution to a "trading intuitive" form, in order to understand how traders and risk controllers use the equations and formulae in their daily work.

3. Relationship between Γ and Θ: how a market maker risk manages a position in real time. In this section we discuss ways a market maker makes money on both short and long term positions. If time permits we will also discuss classical portfolio insurance and its effect on the market.

4. Topics on Demand: according to the group we can discuss other issues, including different dynamics in different markets, actual vs theoretical distributions, exotic options, or other topics of interest. If time permits we may have a mock trading session.

Derivatives in Commodity Markets
Lecturer: Carlos Fabian Tolmasky

1. Generalities. Consumption and non-consumption commodities. Storage. Arbitrage relationships. Convenience yield. Contango, backwardation. Seasonality. Futures and Swaps. Mechanics: exchange traded contracts, over-the-counter contracts. Basis risk. Hedging. Example: Metallgesellschaft.

2. Description of some market structures and participants: metals, grains, energy (petroleum, natural gas, electricity), weather.

3. More on Swaps. Vanilla Options on futures. Spread options: craks, crush and timespread options. Asian options and options on swaps.

4. Term structure models. One factor models. Stochastic convenience yield. Gibson and Schwartz model. Statistics of various futures and volatility curves. Multicurve markets, intra and inter curve correlations.

5. Petroleum market revisited: the market as a description of a refinery and its economics.

Slides:   Commod.pdf

Quantitative Methods for Pricing Fixed-Income Securities
Lecturer: Blaise G. Morton
(based on notes by Blaise Morton and Thomas Spiegel)

1. Introduction to Bonds and the Fixed-Income Markets. What is the market structure and who are the players. Basic models of Treasury Yield curves. Practical and philosophical issues with continuous yield curves. Back to reality with treasury, swap and agency dealer screens, quoting conventions. Treasury curve modeling techniques and basic analyses such as duration, convexity and the convexity bias. Understanding the shape of the treasury curve (following Ilmanen). A formula for expected bond return

2. Interest-Rate Swaps and the LIBOR Curve. Basic models. Building the LIBOR (rate) curve. Money market, interest-rate swaps and Eurodollar futures. The convexity bias in Eurodollar Futures (following Burghardt). The repo market -- Basic trades and determining fair value. Definitions of spread trading and fixed-income arbitrage.

3. Stochastic Models and Derivatives Pricing. Black's model applied to pricing interest-rate caps, floors. Binomial trees for pricing callable bonds using the option-adjusted spread (OAS). PDE pricing models based on stochastic differential equations, example: the first convertible bond model of Brennan and Schwartz. Market Models, example: swaption pricing.

LIST OF CONFIRMED PARTICIPANTS

IMA Public Lecture: Stephen Ross, Behavioral Finance - The Closed End Fund Puzzle, March 30, 2004

Probability and Statistics in Complex Systems: Genomics, Networks, and Financial Engineering, September 1, 2003 - June 30, 2004