# FE635 Financial Enterprise Risk Engineering

(Created page with "Professor: Dr. Rupak Chatterjee<br /> Office: Babbio 5<sup>th</sup> Floor<br /> Email: Rupak.Chatterjee@stevens.edu<br /> Class Schedule: Thursdays 6:15 p.m. to 8:45 p.m., Bab...") |
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Hanlon Lab: Jan18, 25, Feb 1, Friday 5:00 p.m. – 7:00 p.m. (Bloomberg Training)<br /> | Hanlon Lab: Jan18, 25, Feb 1, Friday 5:00 p.m. – 7:00 p.m. (Bloomberg Training)<br /> | ||

Office Hours: Wednesday 3:00 p.m. to 5:00 p.m.<br /> | Office Hours: Wednesday 3:00 p.m. to 5:00 p.m.<br /> | ||

+ | |||

+ | == Course Objectives and Description == | ||

+ | This course is largely a continuation of FE 535. After a review of stochastic processes, a <big>Statistical Arbitrage Strategy</big> is studied in detail. The <big>Optimal Hedging Monte Carlo</big> methodology for derivative pricing is introduced. Potential research topics on OHMC at the Master’s/PhD level will be discussed. <big>Credit Derivatives</big> will be introduced along with the pricing mechanisms using Hazard rates and Copulus. The study of Fat-tailed distributions such as <big>Pareto</big> and those coming from <big>Extreme Value theory</big> will follow. Finally, modern regulatory theory using <big>Basel II, Basel III, and CVA</big> as a starting point will be analyzed. Similar to FE535, the course will largely be based on lecture notes.<br /> | ||

+ | <big>Prerequisites: FE 535 or Solid Knowledge of Statistics/Probability Theory and some familiarity of financial instruments</big> | ||

+ | == Course topics == | ||

+ | * Statistical Arbitrage | ||

+ | * Optimal Hedging Monte Carlo | ||

+ | * Credit Derivatives | ||

+ | * Extreme Value Theory | ||

+ | * Basel II, Basel III, and CVA | ||

+ | * Asset Replication | ||

+ | == Some Useful References == | ||

+ | # Risk Management and Financial Institutions, John Hull, John Wiley & Sons, 2012 (optional) | ||

+ | # An Introduction to the Mathematics of Financial Derivatives, 2nd Edition, Salih Neftci, Academic Press, 2000 (optional) | ||

+ | # Monte Carlo Methods in Financial Engineering, Paul Glasserman, Springer-Verlag, 2004 (optional) | ||

+ | === Syllabus === | ||

+ | Chapters from Lecture notes: Modern Methods of Financial Engineering and Risk Management:<br /> | ||

+ | 4 Stochastic Processes 93<br /> | ||

+ | 5 Optimal Hedging Monte Carlo (OHMC) Methods 129<br /> | ||

+ | 6 Introduction to Credit Derivatives 153<br /> | ||

+ | 7 Modeling Extreme Moves with Power Laws 191<br /> | ||

+ | 8 Basel II, Basel III, and CVA 203<br /> | ||

+ | |||

+ | == IT Requirements == | ||

+ | All the homeworks require the use of Excel with the following properties:<br /> | ||

+ | |||

+ | :1) Functions: | ||

+ | ::a.Offset() | ||

+ | ::b.Rand() | ||

+ | ::c.Norminv() | ||

+ | ::d.Skew(), Kurt(), Average(), Stdev() | ||

+ | ::e.Gammaln() | ||

+ | :2) Data Analysis Function : Histogram<br /> | ||

+ | :3) Some knowledge of VBA will be useful | ||

+ | |||

+ | '''Attention Apple Users:''' Even though you may have Excel, the above functionality does not come with all Apple versions of Excel so you better check to see what your Excel provides. | ||

+ | |||

+ | {| class="wikitable" | ||

+ | |- | ||

+ | ! Week !! Topic(s) !!Homework | ||

+ | |- | ||

+ | | 1 || Stochastic Processes|| | ||

+ | |- | ||

+ | | 2 || Stochastic Processes|| | ||

+ | |- | ||

+ | | 3 || Statistical Modeling of Trading Strategies|| | ||

+ | |- | ||

+ | | 4 || Statistical Modeling of Trading Strategies || | ||

+ | |- | ||

+ | | 5 || Optimal Hedging Monte Carlo (OHMC) Methods|| | ||

+ | |- | ||

+ | | 6 || Optimal Hedging Monte Carlo (OHMC) Methods|| | ||

+ | |- | ||

+ | | 7 || Introduction to Credit Derivatives|| | ||

+ | |- | ||

+ | | 8 || <big>Midterm</big>|| | ||

+ | |- | ||

+ | | 9 || <big>Spring Recess (Study!)</big> || | ||

+ | |- | ||

+ | | 10 || Introduction to Credit Derivatives|| | ||

+ | |- | ||

+ | | 11 || Introduction to Credit Derivatives|| | ||

+ | |- | ||

+ | | 12 || Modeling Extreme Moves with Power Laws|| | ||

+ | |- | ||

+ | | 13 || Modeling Extreme Moves with Power Laws|| | ||

+ | |- | ||

+ | | 14 || Basel II, Basel III, and CVA|| | ||

+ | |- | ||

+ | | 15 || Basel II, Basel III, and CVA|| | ||

+ | |- | ||

+ | | 16 || <big>Final Exam</big> || | ||

+ | |} |

## Revision as of 11:45, 22 January 2013

Professor: Dr. Rupak Chatterjee

Office: Babbio 5^{th} Floor

Email: Rupak.Chatterjee@stevens.edu

Class Schedule: Thursdays 6:15 p.m. to 8:45 p.m., Babbio 122

Hanlon Lab: Jan18, 25, Feb 1, Friday 5:00 p.m. – 7:00 p.m. (Bloomberg Training)

Office Hours: Wednesday 3:00 p.m. to 5:00 p.m.

## Contents |

## Course Objectives and Description

This course is largely a continuation of FE 535. After a review of stochastic processes, a Statistical Arbitrage Strategy is studied in detail. The Optimal Hedging Monte Carlo methodology for derivative pricing is introduced. Potential research topics on OHMC at the Master’s/PhD level will be discussed. Credit Derivatives will be introduced along with the pricing mechanisms using Hazard rates and Copulus. The study of Fat-tailed distributions such as Pareto and those coming from Extreme Value theory will follow. Finally, modern regulatory theory using Basel II, Basel III, and CVA as a starting point will be analyzed. Similar to FE535, the course will largely be based on lecture notes.

Prerequisites: FE 535 or Solid Knowledge of Statistics/Probability Theory and some familiarity of financial instruments

## Course topics

- Statistical Arbitrage
- Optimal Hedging Monte Carlo
- Credit Derivatives
- Extreme Value Theory
- Basel II, Basel III, and CVA
- Asset Replication

## Some Useful References

- Risk Management and Financial Institutions, John Hull, John Wiley & Sons, 2012 (optional)
- An Introduction to the Mathematics of Financial Derivatives, 2nd Edition, Salih Neftci, Academic Press, 2000 (optional)
- Monte Carlo Methods in Financial Engineering, Paul Glasserman, Springer-Verlag, 2004 (optional)

### Syllabus

Chapters from Lecture notes: Modern Methods of Financial Engineering and Risk Management:

4 Stochastic Processes 93

5 Optimal Hedging Monte Carlo (OHMC) Methods 129

6 Introduction to Credit Derivatives 153

7 Modeling Extreme Moves with Power Laws 191

8 Basel II, Basel III, and CVA 203

## IT Requirements

All the homeworks require the use of Excel with the following properties:

- 1) Functions:
- a.Offset()
- b.Rand()
- c.Norminv()
- d.Skew(), Kurt(), Average(), Stdev()
- e.Gammaln()

- 2) Data Analysis Function : Histogram

- 3) Some knowledge of VBA will be useful

**Attention Apple Users:** Even though you may have Excel, the above functionality does not come with all Apple versions of Excel so you better check to see what your Excel provides.

Week | Topic(s) | Homework |
---|---|---|

1 | Stochastic Processes | |

2 | Stochastic Processes | |

3 | Statistical Modeling of Trading Strategies | |

4 | Statistical Modeling of Trading Strategies | |

5 | Optimal Hedging Monte Carlo (OHMC) Methods | |

6 | Optimal Hedging Monte Carlo (OHMC) Methods | |

7 | Introduction to Credit Derivatives | |

8 | Midterm | |

9 | Spring Recess (Study!) | |

10 | Introduction to Credit Derivatives | |

11 | Introduction to Credit Derivatives | |

12 | Modeling Extreme Moves with Power Laws | |

13 | Modeling Extreme Moves with Power Laws | |

14 | Basel II, Basel III, and CVA | |

15 | Basel II, Basel III, and CVA | |

16 | Final Exam |