Financial Engineering-I

Code: MA2261 | L-T-P-C: 3-0-0-6

Overview of financial engineering, financial markets and financial instruments; Interest rates, present and future values of cash flow streams; Risk free assets, bonds and bond pricing, yield, duration and convexity, term structure of interest rates, spot and forward rates; Risky assets, risk-reward analysis, Markowitz’s mean-variance portfolio optimization model and efficient frontier, CAPM; No-arbitrage principle; Derivative securities, forward and futures contracts and their pricing, hedging strategies using futures, interest rate and index futures, swaps; General properties of options, trading strategies involving options; Discrete time financial market model, Cox-Ross-Rubinstein binomial asset pricing model, pricing of European derivative securities by replication; Countable probability spaces, filtrations, conditional expectations and their properties, martingales, Markov processes; Risk-neutral pricing of European and American derivate securities.

Texts:

• M. Capinski and T. Zastawniak, Mathematics for Finance: An Introduction to Financial Engineering, Second Edition, Springer, 2010.
• S. Shreve, Stochastic Calculus for Finance, Volume I, Springer, 2004.

 

References:

• J. C. Hull, Options, Futures and Other Derivatives, Eleventh Edition, Pearson, 2021.
• J. Cvitanic and F. Zapatero, Introduction to the Economics and Mathematics of Financial Markets, Prentice Hall of India, 2007.
• S. Roman, Introduction to the Mathematics of Finance: From Risk Management to Options Pricing, Springer, 2004.
• D. G. Luenberger, Investment Science, Second Edition, Oxford University Press, 2013.
• N. J. Cutland and A. Roux, Derivative Pricing in Discrete Time, Springer, 2012.