Valuation of financial derivatives as a family of algorithmic computations. Analysis of interactions between the underlying financial models (assumptions and constructions) and the efficiency (time and resources) of implementation of these algorithms. Hands-on implementation practice. Topics include concept of a derivative contract and the problem of its pricing; time value of money; market risk and the concept of risk-free portfolio; arbitrage as a valuation axiom; valuation of forward and futures contracts on stock, currencies, interest-rates, indices, commodities; collateral, marking-to-market, margining, and netting; fundamentals of capital asset pricing model and correlations as a valuation assumption; translations among yield curves, bond prices and forward interest rates; valuation of swaps (interest-rate and currency); arbitrage-based valuation of options, option contract as a basic non-linear element in claim construction; binomial trees for option pricing, and the concept of risk-free valuation and recursion from the final claim value; modeling stochastic behavior with Weiner processes, Itô Lemma, the Black-Scholes-Merton model for options; Greeks; volatility smiles and the concept of market-implied computational context; credit risk, estimates of default probabilities from prices of corporate bonds and equity, translations between credit default spreads and default intensities; introduction to issues in valuation of some path dependent and exotic derivatives.
Textbook: Options, Futures, and Other Derivatives by J. C. Hull.