[Forside] [Hovedområder] [Perioder] [Udannelser] [Alle kurser på en side]
Learning objectives:
On successful completion of the course, the students are able to:
• Explain and relate bond prices, bond yields, and the term structure of interest rates.
• Describe the payoffs, practical applications, and general pricing results of interest rate forwards and futures, Eurodollar-futures, bond options, caps, floors, collars, swaps, and swaptions, and explain relations between these derivative securities.
• Explain, analyze, and compare selected continuous-time models of the term structure of interest rates, and derive the prices of selected interest rate derivatives in these models.
• Explain how interest rate risk can be measured and managed using popular continuous-time models of the term structure of interest rates.
• Describe mortgage-backed bonds and explain and compare selected models for the pricing of mortgage-backed bonds.
• Explain and apply selected numerical methods (binomial/trinomial trees, finite difference solutions of partial differential equations, Monte Carlo simulation) to the pricing of derivatives in selected models.
• Explain and analyze the structural and intensity based approaches for credit risk.
• Describe and analyze how credit risk affects the valuation of bonds.
• Describe the payoffs, the practical applications, and the pricing of selected credit derivatives.
• Apply relevant models for the pricing of selected credit derivatives.
• Describe and analyze the importance of default correlation.
Course description:
This course provides techniques for modelling interest rate and credit risk. The models considered in the first half of the course are used to describe the default-free term structure of interest rates and to price default-free fixed income securities. Besides bonds also interest rate forwards and futures, Eurodollar-futures, bond options, caps, floors, collars, swaps, and swaptions are analysed. The question of how to measure and manage interest rate risk is also studied. For financial contracts in practise there is a chance that either counterparty will default on the required payments. This is the focus in the second half of the course where two modelling frameworks of credit risk are considered, namely the "structural approach" and the "intensity based" approach. More time will be spent on the latter approach, since this framework allows us to use many results from the default-free term structure theory developed in the first half of the course. The credit risk models are used to investigate key
objects such as the credit spread, default correlation, and the pricing of defaultable fixed income securities, e.g. corporate bonds, credit default swaps, and credit default obligations.
Course subject areas:
• Bonds, yield curves, and interest rate derivatives
• Models of the term structure of interest rates
• Interest rate risk management
• Mortgage-backed bonds
• Numerical methods: trees, finite differences, Monte Carlo simulation
• Structural models of credit risk
• Intensity models of credit risk
• Credit derivatives
• Default correlation
4388: Derivatives and Risk Management
Simon Lysbjerg Hansen
Lectures with in-class discussions
Literature (Litteratur):
• Munk, Claus: "Fixed income modelling", Lecture notes, Aarhus University, 2010.
• Lando, David: "Credit Risk Modeling: Theory and Applications", Princeton University Press, 2004
Oral exam (20 mins. exam with 20 mins. for preparation)
Examination requirements: Before taking the exam the student has to
pass two assignments. The assignments are only offered in the term the
course is being taught. The assignments are to be solved in a group of
two students unless the lecturer explicitly grants an exemption. The
assignments are evaluated internally on a pass/fail basis. The purpose
of the assignments is to test the student in learning objectives less
suited for oral examination. The oral exam tests the student's ability
to meet the learning objectives by random check.
Examination aids allowed: All - except for any means of electronic communication, including calculators, mobile phones and PCs
