About this course: Financial Engineering is a multidisciplinary field involving finance and economics, mathematics, statistics, engineering and computational methods. The emphasis of FE & RM Part II will be on the use of simple stochastic models to (i) solve portfolio optimization problems (ii) price derivative securities in various asset classes including equities and credit and (iii) consider some advanced applications of financial engineering including algorithmic trading and the pricing of real options. We will also consider the role that financial engineering played during the financial crisis. We hope that students who complete the course and the prerequisite course (FE & RM Part I) will have a good understanding of the "rocket science" behind financial engineering. But perhaps more importantly, we hope they will also understand the limitations of this theory in practice and why financial models should always be treated with a healthy degree of skepticism.
Created by: Columbia University
Taught by: Martin Haugh, Co-Director, Center for Financial Engineering
Industrial Engineering & Operations Research
Taught by: Garud Iyengar, Professor
Industrial Engineering and Operations Research Department
| Commitment | 13 hours videos and quizzes |
| Language | English |
| How To Pass | Pass all graded assignments to complete the course. |
| User Ratings |
Syllabus
WEEK 1
Mean-Variance Analysis and CAPM
Problem formulation and solution; the efficient frontier; including the risk-free asset; the Capital Asset Pricing Model (CAPM);implications of CAPM: α, β, security and capital market lines
6 videos, 2 readings
- Reading: Lesson Supplements
- Video: Overview of Mean Variance
- Video: Introduction to Mean Variance in Excel
- Video: Efficient Frontier
- Video: Mean Variance with a Risk-free Asset
- Video: Risk-free Frontier in Excel
- Video: Capital Asset Pricing Model
- Reading: Quiz Instructions
Graded: Mean-Variance Analysis and CAPM Problem Set
WEEK 2
Practical Issues in Implementing Mean Variance
Problems with mean-variance analysis; ETFs and leveraged ETFs; VaR and CVaR for asset allocation; survivorship bias, performance evaluation and other statistical pitfalls.
6 videos, 2 readings
- Reading: Lesson Supplements
- Video: Implementation Difficulties with Mean Variance
- Video: Negative Exposures and Leveraged ETFs
- Video: Beyond Variance
- Video: Statistical Biases in Performance Evaluation
- Video: How Should Average Returns be Computed?
- Video: Survivorship Bias and Data Snooping
- Reading: Quiz Instructions
Graded: Practical Issues in Implementing Mean Variance Problem Set
WEEK 3
Equity Derivatives in Practice: Part I
Problems with mean-variance analysis; ETFs and leveraged ETFs; VaR and CVaR for asset allocation; survivorship bias, performance evaluation and other statistical pitfalls.
7 videos, 2 readings
- Reading: Lesson Supplements
- Video: Review of the Binomial Model for Option Pricing
- Video: The Black-Scholes Model
- Video: The Greeks: Delta and Gamma
- Video: The Greeks: Vega and Theta
- Video: Risk-Management of Derivatives Portfolios
- Video: Delta-Hedging
- Video: The Volatility Surface
- Reading: Quiz Instructions
Graded: Equity Derivatives in Practice: Part I
WEEK 4
Equity Derivatives in Practice: Part II
More about Black-Scholes, the Greeks and delta-hedging; the volatility surface; pricing derivatives using the volatility surface; model calibration.
5 videos, 1 reading
- Reading: Lesson Supplements
- Video: The Volatility Surface in Action
- Video: Why is There a Skew?
- Video: What the Volatility Surface Tells Us
- Video: Pricing Derivatives Using the Volatility Surface
- Video: Beyond the Volatility Surface and Black-Scholes
WEEK 5
Credit Derivatives and Structured Products
Mechanics and pricing of CDOs; exotic structured credit securities including CDO-squared’s and CDO-cubed’s. Risk management of these products and their role in the financial crisis.
9 videos, 2 readings
- Reading: Lesson Supplements
- Video: Structured Credit: CDOs and Beyond
- Video: The Gaussian Copula Model
- Video: A Simple Example: Part I
- Video: A Simple Example: Part II
- Video: The Mechanics of a “Synthetic” CDO Tranche
- Video: Computing the Fair Value of a CDO Tranche
- Video: Cash and Synthetic CDOs
- Video: Pricing and Risk Management of CDO Portfolios
- Video: CDO-Squared's and Beyond
- Reading: Quiz Instructions
Graded: Credit Derivatives and Structured Products
WEEK 6
Other Applications of Financial Engineering
Real options; energy and commodities modeling; algorithmic trading.
8 videos, 2 readings
- Reading: Lesson Supplements
- Video: Liquidity, Trading Costs, and Portfolio Execution
- Video: Optimal Execution
- Video: Portfolio Execution
- Video: Optimal Execution in Excel 1
- Video: Optimal Execution in Excel 2
- Video: Real Options
- Video: Valuation of Natural Gas and Electricity Related Options
- Video: Real Options in Excel
- Reading: Quiz Instructions
Graded: Other Applications of Financial Engineering
WEEK 7
Background Material
11 videos, 1 reading
- Reading: Lesson Supplements
- Video: Review of Basic Probability
- Video: Review of Conditional Expectations and Variances
- Video: Review of Multivariate Distributions
- Video: The Multivariate Normal Distribution
- Video: Introduction to Martingales
- Video: Introduction to Brownian Motion
- Video: Geometric Brownian Motion
- Video: Review of Vectors
- Video: Review of Matrices
- Video: Review of Linear Optimization
- Video: Review of Nonlinear Optimization
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Ratings and Reviews
very good course. Part II focuses more on asset allocation.
Some tasks were unclear, but overall great course
It is a very good course with excellent learning materials and video lectures. For anyone interested to know about financial risk management and derivatives, it is a very good course with examples and practical exercises!
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HY
It is really a great course on financial engineering! I have learned much from it, very useful and suggestive!