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Security Pricing: Models & Computation

Spring 2008 EMBA Course

B7835-001: Security Pricing: Models & Computation

Menu B, Menu B - 01:00AM to 02:00AM

Instructor: Mark Broadie


Financial models have come to be used extensively in the securities industry. In this course students will study models for pricing and hedging equity and fixed income derivative securities. The course begins by developing a standard tool for hedging and risk management known as regression hedging. Models and theoretical underpinnings for pricing equity options are covered next. In addition to standard European and American equity options on a single underlying asset, students will investigate the pricing and hedging of path-dependent options, such as barriers, lookbacks, and Asian options, and multi-asset options, including spread, outperformance, and basket options. They will study the standard Black-Scholes model and its multi-asset extension, and will briefly cover jump-diffusion and stochastic volatility models which are capable of explaining some observed deviations of option prices from the Black-Scholes model. Since derivative securities are typically held as part of larger portfolios, the course will briefly cover the topics of asset allocation and portfolio optimization. Investments over long time horizons can have very different characteristics than short-term investments, so multiperiod investment planning will also be studied. The pricing of fixed income derivatives requires a model of the evolution of the entire yield curve. After investigating the statistical properties of yield curve movements, students will study the Ho-Lee and Black-Derman-Toy single-factor interest rate models and then proceed to the general multi-factor Heath-Jarrow-Morton interest rate model. These models will be used to price caps, floors, swaptions, callable bonds, and other interest-rate sensitive securities.