Financial Engineering-II

Code: MA3261 | L-T-P-C: 3-0-0-6

Continuous time financial market models, Black-Scholes-Merton model, Black-Scholes-Merton equation and formula, dividend paying assets, forwards and futures, risk-neutral valuation of European, American and Exotic derivative securities, change of numeraire, hedging of contingent claims, Greeks, implied volatility, volatility smile; Options on futures; Incomplete markets, stochastic volatility models, pricing and hedging in incomplete markets; Fixed income markets, bonds and interest rates, pricing of fixed income securities, term structure equation; Short rate models, martingale models for short rate (Vasicek, Cox-Ingersoll-Ross, Dothan, Ho-Lee and Hull-White models), multifactor models; Forward rate models, Heath-Jarrow-Morton framework, pricing and hedging under short rate and forward rate models, swaps, caps and floors; LIBOR and swap market models.

Texts:

• T. Bjork, Arbitrage Theory in Continuous Time, Third Edition, Oxford University Press, 2003.
• S. Shreve, Stochastic Calculus for Finance, Volume II, Springer, 2004.

 

References:

• J. C. Hull, Options, Futures and Other Derivatives, Eleventh Edition, Pearson, 2021.
• D. Brigo and F. Mercurio, Interest Rate Models: Theory and Practice, Springer, 2006.
• N. H. Bingham and R. Kiesel, Risk-Neutral Valuation, Second Edition, Springer, 2004.
• J. Cvitanic and F. Zapatero, Introduction to the Economics and Mathematics of Financial Markets, Prentice Hall of India, 2007.
• M. Musiela and M. Rutkwoski, Martingale Method in Financial Modelling, Second Edition, Springer, 2005.