| CS 774 Advanced Computational Finance Fall 2009 |
Schedule of Classes
| Course Instructor: |
Professor Peter Forsyth |
|---|---|
| Lecture Location: |
MC 2036 |
| Time: | MWF 3:30-4:20 pm |
|
Instructor Office Hours: |
Tue 4:00-5:00, DC 3631 |
What is this course about?The past several decades have witnessed an explosion in the trading of financial derivatives. One of the most common derivatives is an option, which gives the holder the right, but not the obligation, to buy or sell the underlying security for a fixed price at a future date. Derivatives can be used by financial institutions to hedge risk, and hence can be viewed as a form of financial insurance. Determination of the fair market value of this insurance, and the hedging strategy used to reduce the risk in selling this insurance, is a problem in option pricing. Modern financial institutions rely on risk management software to optimally manage portfolios and set up dynamic hedging strategies. Recently, we have seen the results of poor or non-existent hedging practices in financial institutions. This has resulted in many bank and insurance company failures. In fact, many academics warned that the models used by banks were inadequate, and underestimated risk. Why did the banks use such models? Any model which underestimated risk allowed bank CEOs to boast of large (apparent) profits, which then triggered rich bonuses to executives and traders. The CEOs and traders get to retire rich while the shareholders and the taxpayers take the losses. This course will cover such topics as: Monte Carlo methods, lattice methods, and numerical PDE (Partial Differential Equation) techniques for pricing and hedging options. Methods for valuing exotic options (Asian, Parisian, barrier, and shout) will be presented. Particular attention will be paid to models which more accurately represent real markets: jump processes, regime switching, the effect of trading price impact and transaction costs, and optimal decision making. This will lead us to a discussion of algorithms for partial integro differential equations, and optimal stochastic control (dynamic programming, Hamilton Jacobi Bellman equations). General Information
Announcements
Course GradingAssignments/ProjectSigning In
Handouts/Slides
Useful Links
Option PricesInterest rates
Some more referencesCollaboration and Academic IntegrityYou are encouraged to discuss assignments with other individuals in the class. Submitted assignments should be your own work. Academic Integrity: In order to maintain a culture of academic integrity, members of the University of Waterloo community are expected to promote honesty, trust, fairness, respect and responsibility. All members of the UW community are expected to hold to the highest standard of academic integrity in their studies, teaching, and research. The Office of Academic Integrity's website (www.uwaterloo.ca/academicintegrity) contains detailed information on UW policy for students and faculty. This site explains why academic integrity is important and how students can avoid academic misconduct. It also identifies resources available on campus for students and faculty to help achieve academic integrity in — and out — of the classroom. Grievance: A student who believes that a decision affecting some aspect of his/her university life has been unfair or unreasonable may have grounds for initiating a grievance. Read Policy 70 - Student Petitions and Grievances, Section 4, http://www.adm.uwaterloo.ca/infosec/Policies/policy70.htm When in doubt please be certain to contact the department's administrative assistant who will provide further assistance. Discipline: A student is expected to know what constitutes academic integrity, to avoid committing academic offenses, and to take responsibility for his/her actions. A student who is unsure whether an action constitutes an offense, or who needs help in learning how to avoid offenses (e.g., plagiarism, cheating) or about “rules” for group work/collaboration should seek guidance from the course professor, academic advisor, or the Undergraduate Associate Dean. When misconduct has been found to have occurred, disciplinary penalties will be imposed under Policy 71 – Student Discipline. For information on categories of offenses and types of penalties, students should refer to Policy 71 - Student Discipline, http://www.adm.uwaterloo.ca/infosec/Policies/policy71.htm Avoiding Academic Offenses: Most students are unaware of the line between acceptable and unacceptable academic behaviour, especially when discussing assignments with classmates and using the work of other students. For information on commonly misunderstood academic offenses and how to avoid them, students should refer to the Faculty of Mathematics Cheating and Student Academic Discipline Policy, http://www.math.uwaterloo.ca/navigation/Current/cheating_policy.shtml Appeals: A student may appeal the finding and/or penalty in a decision made under Policy 70 - Student Petitions and Grievances (other than regarding a petition) or Policy 71 - Student Discipline if a ground for an appeal can be established. Read Policy 72 - Student Appeals, http://www.adm.uwaterloo.ca/infosec/Policies/policy72.htm Back to topDisabilitiesNote for students with disabilities: The Office for Persons with Disabilities (OPD), located in Needles Hall, Room 1132, collaborates with all academic departments to arrange appropriate accommodations for students with disabilities without compromising the academic integrity of the curriculum. If you require academic accommodations to lessen the impact of your disability, please register with the OPD at the beginning of each academic term. Back to top |
This page written and maintained by paforsyt@cs.uwaterloo.ca