MAFS5040 Quantitative Methods for Fixed-Income Instruments
Scope and Objective
This course introduces modern interest-rate derivative models. Starting from a general discussion of arbitrage pricing theory, we derive the Heath-Jarrow-Morton framework for interest rate modeling. Several well-known short-rate models will be introduced as special cases. After having built the foundation for arbitrage pricing methodology of (interest-rate) derivatives, we will discuss derivatives pricing with short-rate, LIBOR and affine models. We will also give a comprehensive coverage on volatility and correlation adjustments.
Prerequisite
Probability and
stochastic calculus, knowledge of financial markets desirable.
Textbook
Wu, L. Interest Rate Modeling: Theory and Practice. Chapman & Hall / CRC. May 1, 2009.
Major Reference Books
M. Avellaneda and P. Laurence, Quantitative modeling, CRC Press; 1st edition (September 17, 1999). ISBN: 1584880317.
M. Baxter and A. Rennie, Financial calculus: An introduction to derivative pricing. Cambridge University Press (1996). ISBN: 0-521-55289-3.
D. Brigo and F. Mercurio, Interest Rate Models, Springer-Verlag (2001). ISBN: 3540417729.
M. Musiela and M. Rutkowski, Martingale Methods in Financial Modelling, Springer-Verlag; (September 12, 1997). ISBN: 354061477X.
D. Duffie, Dynamic Asset Pricing Theory, 3rd edition, Princeton University Press (2001). ISBN: 069109022X
Instructor
Prof. Wu, Rm 3449, X-7435, malwu@ust.hk
Lecture Hours and Room
Thurs 1930-2220, Rm 3008.
Wed 1930-2220, Rm 2407 (lift 17-18)
Office Hours
Thurs 0900-1200 or by appointment
Grading Scheme (Tentative)
We will have bi-weekly homework assignments, one midterm and one final exam. The scores will contribute to the final grade according to the weights (40%, 20%, 40%).
Syllabus
Change of measure
Martingale representation theorem / Arbitrage pricing theory
Multi-asset continuous-time model
Interest rates and fixed-income instruments
Heath-Jarrow-Morton (HJM) model
Estimation of the HJM model; principal component analysis
Short-rate models
Forward measures
LIBOR market models
Convexity and correlation adjustment
Affine models
Smile models for interest-rate derivatives
Convertible bonds
Inflation derivatives
Post-crisis evolution of interest-rate models
Final Schedule
Time: May 23, from 7:30-10:30pm
Venue: Room 2502 (near lefts 25 & 26)
Coverage: The emphasis is on Chapter 6-9, but may also refer to materials of Chapter 2, 3, 4 and Section 5.3-5.4
Format: One A4-size formula sheet
Midterm Schedule
Time: March 28, from 7:30-9:00pm
Coverage: Chapter 2, 3, 4 and Section 5.3-5.4
Format: Open-book exam
Results: Departmental grading system
Useful Links
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Federal Open Market Committee (FOMC)
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Euribor-European Banking Federation
Comparison of Market Sizes of Various Assets
Bank for International Settlements (Quarter Review, summary tables)
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HKAB HKD Interest Settlement Rates
Interest Rates offered by Hang Seng Bank
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