Body of Knowledge
Financial Engineering for Investment
The module "Financial Engineering for Investment" covers valuation across instruments and asset classes:
- the standard financial engineering materials on risk-neutral valuation for derivatives (Black-Scholes, martingales, etc.)
- non-linear actuarial pricing (distortion measures, risk premium arguments, etc.)
- company/deal valuation, typically more tied to the investment banking and strategic consulting professions (discounted cash flows, comparable analysis, etc.).
This module also covers the connections between valuation, instrument-specific sensitivities (the "Greeks") and the different risk factors in the market.
Finally, this module covers the techniques (Monte Carlo full repricing, analytical approximations, etc.) to model the value of the different instruments at the future investment horizon, in addition to their present value.
- the standard financial engineering materials on risk-neutral valuation for derivatives (Black-Scholes, martingales, etc.)
- non-linear actuarial pricing (distortion measures, risk premium arguments, etc.)
- company/deal valuation, typically more tied to the investment banking and strategic consulting professions (discounted cash flows, comparable analysis, etc.).
This module also covers the connections between valuation, instrument-specific sensitivities (the "Greeks") and the different risk factors in the market.
Finally, this module covers the techniques (Monte Carlo full repricing, analytical approximations, etc.) to model the value of the different instruments at the future investment horizon, in addition to their present value.
Linear pricing theory: core
Fundamental axioms: law of one price, no-arbitrage, linearity
Stochastic discount factor
Fundamental theorem of asset pricing
Risk-neutral pricing
Capital asset pricing model framework and security market line (SML)
Covariance principle
Stochastic discount factor
Fundamental theorem of asset pricing
Risk-neutral pricing
Capital asset pricing model framework and security market line (SML)
Covariance principle
Linear pricing theory: further assumptions
Completeness
Equilibrium: pure capital asset pricing model (CAPM)
Arbitrage pricing theory (APT)
Intertemporal consistency and martingales
Equilibrium: pure capital asset pricing model (CAPM)
Arbitrage pricing theory (APT)
Intertemporal consistency and martingales
Non-linear pricing theory
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