|
Description:
|
In this course modern valuation methods will be used to analyze financial claims whose value depends upon interest rate movements. Instruments such as bonds both callable and noncallable mortgages and bond options will be examined. The cash flow on these securities will be determined. Using various numerical methods such as computer-based simulation and backwards recursion the comparative riskiness and valuations of alternative instruments and the precision of the estimated valuations will be examined. The effect of the assumed interest rate dynamics and the prevailing interest rate conditions for the riskiness and the value of various features of these contracts also will be analyzed. A variety of alternative interest rate models will be developed in the course along with robust methods based solely upon the absence of arbitrage. The power of convexity and duration and the importance of optionality upon risk management and valuation will be explored. Credit risk has become increasingly important in fixed-income valuation. We will address the nature of runs, hedging of credit risk, the role of credit default swaps and the management of counter-party risk in derivatives trading. Students will use the substantive approaches developed in the course to address concrete problems by spreadsheet techniques. Illustrative examples will be extensively used in the course. The course requirements will include several homework sets and a final exam. (Rev. 11/09-CS)
|
