Course 5: Financial Engineering

Financial Engineering covers the computation of the fair valuation and joint return distribution for the main asset classes of financial instruments.

In particular, Financial Engineering covers the following topics:

Valuation across financial instruments, including linear pricing theory foundations, risk-neutral valuation for derivatives, capital asset pricing framework.
Identification, modeling and forecasting of key risk drivers for the returns of equities, fixed income, derivatives, credit, high frequency, foreign exchange
Repricing techniques: Monte Carlo full repricing, analytical Greeks approximations

After the course you will obtain a Statement of Completion. Furthermore, you can choose to complete an optional code-based project that will count as one of the two Practical Projects towards the ARPM Certification.

Syllabus

The course covers in depth the Financial Engineering topics in the Lab.

The Checklist: Overview

• Key notation tenets

• Summary: "Quantitative Finance Checklist"

• Financial engineering

• Risk management

• Portfolio management

• About quantitative finance: P versus Q

Step 1 - Valuation theory

• Step 1a: Valuation theory

• Fundamental axioms of linear pricing

• Stochastic discount factor

• Identification issues

• Completeness

• Fundamental theorem of asset pricing

Step 1 - Valuation practice

• CAPM

• APT

• Risk-neutral pricing

• Step 1b: Valuation - practice

• Calibration

• Equity

• European Options

• Fixed Income

Step 2 - Risk drivers identification

• Risk drivers identification

• Equities

• Currencies

• Fixed-income

• Derivatives

• Credit

Step 3a - Univariate quest for invariance

• Univariate quest for invariance

• Simple tests

• Efficiency

• Trends

• Seasonality

• Mean reversion - short memory

• Volatility clustering

• Discrete migrations

Step 3b - Multivariate quest and forecasting

• Multivariate quest and forecasting

• Mean-covariance forecasting

• Probabilistic forecasting - Historical

• Probabilistic forecasting - Copula-marginal

Step 4 - Repricing

• Repricing

• Repricing functions

• Techniques

• Equities

• Fixed income

• Derivatives

• Credit

• Currencies