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Interest Rate Models

Damir Filipović

4.5

Based on 188 ratings

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Damir Filipović

This course gives you an easy introduction to interest rates and related contracts. These include the LIBOR, bonds, forward rate agreements, swaps, interest rate futures, caps, floors, and swaptions. We will learn how to apply the basic tools duration and convexity for managing the interest rate risk of a bond portfolio. We will gain practice in estimating the term structure from market data. We will learn the basic facts from stochastic calculus that will enable you to engineer a large variety of stochastic interest rate models. In this context, we will also review the arbitrage pricing theorem that provides the foundation for pricing financial derivatives. We will also cover the industry standard Black and Bachelier formulas for pricing caps, floors, and swaptions.

At the end of this course you will know how to calibrate an interest rate model to market data and how to price interest rate derivatives.

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What's inside

Syllabus

Introduction

Interest Rates and Related Contracts

We learn various notions of interest rates and some related contracts. Interest is the rent paid on a loan. A bond is the securitized form of a loan. There exist coupon paying bonds and zero-coupon bonds. The latter are also called discount bonds. Interest rates and bond prices depend on their maturity. The term structure is the function that maps the maturity to the corresponding interest rate or bond price. An important reference rate for many interest rate contracts is the LIBOR (London Interbank Offered Rate). Loans can be borrowed over future time intervals at rates that are agreed upon today. These rates are called forward or futures rates, depending on the type of the agreement. In an interest rate swap, counterparties exchange a stream of fixed-rate payments for a stream of floating-rate payments typically indexed to LIBOR. Duration and convexity are the basic tools for managing the interest rate risk inherent in a bond portfolio. We also review some of the most common market conventions that come along with interest rate market data.

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Explores interest rates and related contracts, which are essential topics in finance

Taught by Damir Filipović, a recognized expert in interest rate modeling

Develops essential tools, such as duration and convexity, for managing interest rate risk

Teaches practical applications of interest rate derivatives, including caps, floors, and swaptions

Provides a solid foundation for understanding and pricing interest rate derivatives

Core audience includes finance professionals, students specializing in finance, and individuals seeking knowledge in interest rate derivatives

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Reviews summary

Theoretical foundations of ir models

According to learners, this course provides a solid theoretical foundation in interest rate models and related derivatives, covering key industry models like Black and Bachelier. While the syllabus promises an 'easy introduction,' students frequently note the material is very mathematically intense and requires strong prerequisites in finance and math. Some feel the discussion of LIBOR feels slightly outdated and suggest adding more practical implementation examples. Despite these challenges, it's considered excellent for understanding core concepts and valuable for quantitative finance roles.

Model calibration section is very useful.

"The calibration section is very useful."

"Learning how to calibrate models was a key takeaway for me."

"Gives practical insights into calibrating models to market data."

Provides a deep theoretical understanding of models.

"Good theoretical coverage of interest rate models."

"Excellent course for understanding the core concepts and arbitrage pricing."

"A solid overview of key models... Goes deep into theory."

Some content dated, needs more implementation.

"Content is solid but feels a bit dated discussing LIBOR so much."

"Needs more modern examples and perhaps some coding exercises for implementation."

"I wished there were more hands-on assignments involving model coding."

Challenging without strong math/finance background.

"The 'easy introduction' was misleading. This course is very mathematically intense..."

"I struggled with the prerequisites; you really need a strong finance background."

"This course requires a very strong background in stochastic calculus and financial concepts."

Activities

Be better prepared before your course. Deepen your understanding during and after it. Supplement your coursework and achieve mastery of the topics covered in Interest Rate Models with these activities:

Review Hull's Options, Futures, and Derivatives

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Review the basics of financial derivatives to strengthen foundational understanding before the course begins.

View Options, Futures, and Other Derivatives on Amazon

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Read through chapters 1-3 to grasp the fundamental concepts of financial derivatives.
Solve the end-of-chapter problems to reinforce your understanding of key topics.

Follow Coursera's Introduction to Financial Markets tutorial

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Supplement your learning by exploring Coursera's tutorial on financial markets, covering concepts related to interest rates.

Browse courses on Financial Markets

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Enroll in the 'Introduction to Financial Markets' tutorial on Coursera.
Complete all modules and quizzes to gain a comprehensive understanding of financial markets.

Join a study group to discuss course concepts

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Enhance your learning by engaging with peers in a study group, discussing course concepts, solving problems, and sharing insights.

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Identify classmates or fellow students interested in forming a study group.
Establish regular meeting times and decide on topics to cover.
Take turns leading discussions, presenting concepts, and facilitating problem-solving.

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Solve practice problems on interest rate calculations

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Enhance your understanding of interest rate calculations by solving practice problems, reinforcing your grasp of the concepts.

Browse courses on Interest Rates

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Gather practice problems on interest rate calculations from textbooks or online resources.
Dedicate time to solving these problems regularly, checking your answers for accuracy.

Create a visual representation of the term structure

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Solidify your understanding of the term structure by creating a visual representation, such as a graph or diagram that illustrates its shape and movements.

Browse courses on Term Structure

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Gather data on interest rates for different maturities.
Plot the data on a graph, with the y-axis representing interest rates and the x-axis representing maturities.
Analyze the shape of the term structure and identify any patterns or trends.

Attend a workshop on stochastic calculus

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Expand your knowledge by attending a workshop on stochastic calculus, a foundational topic for modeling interest rates and other financial variables.

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Research workshops on stochastic calculus in your area or online.
Select a workshop that aligns with your schedule and learning goals.
Attend the workshop, actively participate in discussions, and take notes for future reference.

Contribute to the QuantLib open-source library

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Apply your understanding of interest rate modeling by contributing to QuantLib, an open-source library for quantitative finance.

Browse courses on Quantitative Finance

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Familiarize yourself with the QuantLib library and its documentation.
Identify an area where you can make a meaningful contribution.
Write code, test your changes, and submit a pull request to the QuantLib repository.

Volunteer as a financial analyst intern

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Gain practical experience in interest rate risk management by volunteering as a financial analyst intern at a financial institution.

Browse courses on Financial Analysis

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Research financial institutions that offer internship programs in financial analysis.
Apply for internships that align with your interests and skills.
During the internship, actively participate in projects related to interest rate risk management, such as stress testing and portfolio optimization.

Career center

Learners who complete Interest Rate Models will develop knowledge and skills that may be useful to these careers:

Financial Analyst

A Financial Analyst will be concerned with the prices of financial instruments. In this course, you will learn how these prices change over time according to interest rates and their derivatives. This pattern of change is called the term structure of interest rates. You will also learn the mathematical tools and the industry standard formulas for estimating this term structure from the market data and for pricing interest rate derivatives.

See salaries and explore the career path for Financial Analyst

Portfolio Manager

Portfolio Managers will be concerned about the risk inherent in their portfolio of investments. In this course, you will learn basic tools for managing the interest rate risk of a bond portfolio, namely duration and convexity.

See salaries and explore the career path for Portfolio Manager

Quantitative Analyst

A Quantitative Analyst needs a background in stochastic calculus to develop financial risk models. In this course, you will learn how to price options on bonds using the arbitrage pricing theorem and stochastic models.

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Risk Analyst

A Risk Analyst is involved in valuing and hedging portfolios of financial assets. In this course, you will learn how to calibrate a stochastic interest rate model to market data, which is an important part of risk analysis.

See salaries and explore the career path for Risk Analyst

Derivatives Trader

A Derivatives Trader needs to understand the factors that affect the prices of derivative products, including interest rate derivatives. In this course, you will learn how to price interest rate derivatives, which may come up in your day-to-day work.

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Financial Risk Manager

A Financial Risk Manager needs to understand the risk associated with different financial instruments. In this course, you will learn how to model interest rate risk and how to hedge it.

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Actuary

An Actuary analyzes financial risk and uncertainty. In this course, you will learn the stochastic calculus that enables you to engineer a large variety of stochastic interest rate models. This will help you to develop better models to value insurance policies.

See salaries and explore the career path for Actuary

Credit Analyst

A Credit Analyst assesses the creditworthiness of borrowers. In this course, you will learn the interest rate market conventions that come along with interest rate market data. This knowledge will help you to understand and assess different kinds of debt.

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Investment Analyst

An Investment Analyst advises clients on investment strategy. In this course, you will learn how to price bonds. This knowledge will help you to understand and assess different kinds of investments.

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Data Scientist

A Data Scientist uses data to solve problems. In this course, you will learn how to estimate the term structure from market data. This knowledge will help you to develop better models to solve problems in a variety of industries.

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Consultant

A Consultant provides advice to businesses. In this course, you will learn about the different types of interest rate contracts and their applications. This knowledge will help you to advise businesses on how to manage their interest rate risk.

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Economist

An Economist studies the economy. In this course, you will learn the term structure of interest rates. This knowledge will help you to understand how interest rates affect the economy.

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Professor

A Professor teaches and conducts research. In this course, you will learn the stochastic calculus that enables you to engineer a large variety of stochastic interest rate models. This knowledge will help you to develop better models to teach your students and to conduct your research.

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Software Engineer

A Software Engineer designs, develops, and tests software applications. In this course, you will learn the stochastic calculus that enables you to engineer a large variety of stochastic interest rate models. While this course does not teach software engineering, the stochastic calculus you will learn may be applied to the development of financial software.

See salaries and explore the career path for Software Engineer

Statistician

A Statistician collects, analyzes, and interprets data. In this course, you will learn the mathematical tools and the industry standard formulas for estimating the term structure from the market data. This knowledge will help you to develop better statistical models.

See salaries and explore the career path for Statistician

Reading list

We've selected 28 books that we think will supplement your learning. Use these to develop background knowledge, enrich your coursework, and gain a deeper understanding of the topics covered in Interest Rate Models.

Term-Structure Models

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An introductory text on interest rate modeling by the instructor of this course, the book serves as a valuable supplement to the course's lecture notes.

Interest Rate Models

What's inside

Syllabus

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Reviews summary

Theoretical foundations of ir models

Activities

Career center

Reading list

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