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Garud Iyengar,
Ali Hirsa,
and
Martin Haugh
This course discusses topics in derivative pricing. The first module is designed to understand the Black-Scholes model and utilize it to derive Greeks, which measures the sensitivity of option value to variables such as underlying asset price, volatility, and time to maturity. Greeks are important in risk management and hedging and often used to measure portfolio value change. Then we will analyze risk management of derivatives portfolios from two perspectives—Greeks approach and scenario analysis. The second module reveals how option’s theoretical price links to real market price—by implied volatility. We will discuss pricing by volatility surface as well as explanations of volatility smile and skew, which are common in real markets. The third module involves topics in credit derivatives and structured products and focuses on Credit Debit Obligation (CDO), which played an important part in the past financial crisis starting from 2007. We will cover CDO’s definition, simple and synthetic versions of CDO, and CDO portfolios. The final module is the application of option pricing methodologies and takes natural gas and electricity related options as an example to introduce valuation methods such as dynamic programming in real options.
Register for this course and see more details by visiting:
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What's inside
Syllabus
Course Overview
Equity Derivatives in Practice: Part I
This module contains the first part of equity derivatives. After a brief review on the binomial model, we introduce Black-Scholes model and how to utilize this model to derive so-called "Greeks." Greeks are very important indices in options, which measure the sensitivity of option value to a wide range of variables such as stock price and volatility. We are also covering risk management and hedging. Greeks play an important role in risk management and hedging, as traders and quants often use Greeks approach to hedge and construct their portfolios. Moreover, we will introduce scenario analysis and how Greeks are used to measure portfolio value change. In the end, we are covering an introduction to implied volatility and volatility smile. Implied volatility is a key link between market option prices and options prices under the framework of Black-Scholes model. We'll be covering more about this topic in the next module.
Read more
Syllabus
Course Overview
Equity Derivatives in Practice: Part I
This module contains the first part of equity derivatives. After a brief review on the binomial model, we introduce Black-Scholes model and how to utilize this model to derive so-called "Greeks." Greeks are very important indices in options, which measure the sensitivity of option value to a wide range of variables such as stock price and volatility. We are also covering risk management and hedging. Greeks play an important role in risk management and hedging, as traders and quants often use Greeks approach to hedge and construct their portfolios. Moreover, we will introduce scenario analysis and how Greeks are used to measure portfolio value change. In the end, we are covering an introduction to implied volatility and volatility smile. Implied volatility is a key link between market option prices and options prices under the framework of Black-Scholes model. We'll be covering more about this topic in the next module.
Read more
Equity Derivatives in Practice: Part II
This module contains the second part of equity derivatives. Following past module, we'll continue discussing implied volatility and volatility smile. We introduce two main explanations about volatility skew: risk aversion and leverage effect. Next, we will cover how to utilize volatility surface to price derivatives, including digital options and range accruals. Meanwhile, we will introduce a method to obtain risk-neutral density of terminal stock price distribution from option prices. We will also cover two additional topics about joint distribution of two securities and dynamic replication in practice. In module 3, you will have a real-world assignment where you will use all the knowledge from previous modules to solve the problems about equity derivatives. In this assignment, you will be exposed to many think-about questions where you can jump out of the Black-Scholes framework and think in a model-free world.
Review and Assignment for Equity Derivatives
Credit Derivatives and Structured Products
This module involves topics in credit derivatives and structured products. Firstly, we will cover the definition of Credit Debit Obligation (CDO) and Gaussian Copula model, where Gaussian Copula can be used to compute the portfolio loss function. CDO plays an important part in the past financial crisis starting from 2008, and it is an important part of working for traders and quants in Securitized Products Group (SPG). Next, we will introduce a simple version of 1-period CDO, where you can learn how to get the expected tranche losses and understand CDO from observations about equity, mezzanine and senior tranches. In the end, we will cover the mechanism about synthetic CDO and the method to calculate the fair value of premium lag, default lag, and CDO tranche. We will also cover CDO portfolios, including pricing and risk management of CDO portfolios and higher-order CDO products.
Other Applications of Financial Engineering
This module involves topics in real options. Real options are based on highly volatile underlying assets with many uncertainties including market, industrial, technical, organizational, and political issues. We take natural gas and electricity related options as an example to introduce valuation methods such as dynamic programming in real options.
Good to know
Good to know
Know what's good ,
what to watch for , and
possible dealbreakers
Develops Greeks, which are core tools for option pricing and risk management used in today's markets
Covers Credit Debit Obligation (CDO), which played an important part in the 2007 subprime mortgage crisis
Taught by Martin Haugh, Garud Iyengar, Ali Hirsa, who are recognized experts in the field of financial engineering
Examines quantitative methods used in energy and commodity financial engineering
Suitable for learners who want to develop a solid understanding of financial engineering techniques
Advises students to take a course in calculus and linear algebra before taking this course
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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 Advanced Topics in Derivative Pricing with these
activities:
Organize and review course notes
Show steps
Organizing and reviewing your course notes regularly will enhance your retention of the material, making it easier to recall and apply the concepts covered in the course.
Show steps
-
Gather all course notes, assignments, and quizzes.
-
Organize the materials by topic and module.
-
Review the notes regularly, focusing on key concepts and formulas.
-
Identify areas where you need further clarification or practice.
Study Hull's Options, Futures, and Derivatives
Show steps
This book provides in-depth coverage of derivative pricing and risk management techniques, complementing the course material and broadening your understanding of the subject.
Show steps
-
Read the assigned chapters and take detailed notes.
-
Solve the practice problems and case studies at the end of each chapter.
-
Discuss the key concepts with classmates or the instructor during office hours.
Watch videos on Black-Scholes Model
Show steps
Watching online tutorials on Black-Scholes Model will solidify your understanding of the model and its application in pricing financial derivatives.
Browse courses on
Black-Scholes Model
Show steps
-
Identify relevant online tutorials on Black-Scholes Model.
-
Watch the tutorials carefully and take notes.
-
Practice using the Black-Scholes Model to price financial derivatives.
-
Answer questions and solve problems related to Black-Scholes Model.
Five other activities
Expand to see all activities and additional details
Show all eight activities
Participate in a study group to discuss derivative pricing concepts
Show steps
Engaging in a study group for derivative pricing will provide you with the opportunity to clarify concepts, learn from your peers, and reinforce your understanding of the course material.
Show steps
-
Identify a study partner or group with complementary strengths and weaknesses.
-
Establish a regular meeting schedule and agenda.
-
Discuss the course material, work on assignments together, and share insights.
Calculate Greeks using Black-Scholes Model
Show steps
Practicing the calculation of Greeks using Black-Scholes Model will strengthen your understanding of the sensitivity of option value to variables such as underlying asset price, volatility, and time to maturity.
Browse courses on
Black-Scholes Model
Show steps
-
Gather necessary data such as underlying asset price, volatility, strike price, and time to maturity.
-
Input the data into the Black-Scholes Model and calculate option price.
-
Calculate Greeks (Delta, Gamma, Theta, Vega, and Rho) using the appropriate formulas.
Write a blog post on a recent development in derivative pricing
Show steps
Writing a blog post on a recent development in derivative pricing demonstrates your understanding of the topic and allows you to share your knowledge with others, reinforcing your learning.
Show steps
-
Research the latest developments in derivative pricing.
-
Analyze the implications of these developments for investors and market participants.
-
Write a clear and concise blog post summarizing your findings.
-
Share your blog post on relevant platforms and engage with readers.
Develop a portfolio of derivative investments
Show steps
Creating a portfolio of derivative investments will not only enhance your understanding of derivative pricing but also provide you with practical experience in managing risk and optimizing returns.
Browse courses on
Portfolio Management
Show steps
-
Research different types of derivatives and their risk-return profiles.
-
Develop an investment strategy aligned with your financial goals and risk tolerance.
-
Select and purchase derivatives to create a diversified portfolio.
-
Monitor the portfolio regularly and make adjustments as needed.
Develop a model to quantify the risk of a derivative portfolio
Show steps
Developing a model to quantify the risk of a derivative portfolio will enable you to identify and manage potential risks, enhancing your ability to make informed investment decisions.
Browse courses on
Risk Management
Show steps
-
Gather historical data on the underlying assets and derivatives.
-
Choose appropriate statistical and econometric techniques to model the risk.
-
Develop a model that can estimate the VaR, Expected Shortfall, and other risk measures.
-
Validate the model and implement it to manage the risk of the portfolio.
Organize and review course notes
Show steps
Organizing and reviewing your course notes regularly will enhance your retention of the material, making it easier to recall and apply the concepts covered in the course.
Show steps
Show steps
Show steps
- Gather all course notes, assignments, and quizzes.
- Organize the materials by topic and module.
- Review the notes regularly, focusing on key concepts and formulas.
- Identify areas where you need further clarification or practice.
Study Hull's Options, Futures, and Derivatives
Show steps
This book provides in-depth coverage of derivative pricing and risk management techniques, complementing the course material and broadening your understanding of the subject.
Show steps
Show steps
Show steps
- Read the assigned chapters and take detailed notes.
- Solve the practice problems and case studies at the end of each chapter.
- Discuss the key concepts with classmates or the instructor during office hours.
Watch videos on Black-Scholes Model
Show steps
Watching online tutorials on Black-Scholes Model will solidify your understanding of the model and its application in pricing financial derivatives.
Browse courses on
Black-Scholes Model
Show steps
Show steps
Show steps
- Identify relevant online tutorials on Black-Scholes Model.
- Watch the tutorials carefully and take notes.
- Practice using the Black-Scholes Model to price financial derivatives.
- Answer questions and solve problems related to Black-Scholes Model.
Five other activities
Expand to see all activities and additional details
Show all eight activities
Participate in a study group to discuss derivative pricing concepts
Show steps
Engaging in a study group for derivative pricing will provide you with the opportunity to clarify concepts, learn from your peers, and reinforce your understanding of the course material.
Show steps
Show steps
Show steps
- Identify a study partner or group with complementary strengths and weaknesses.
- Establish a regular meeting schedule and agenda.
- Discuss the course material, work on assignments together, and share insights.
Calculate Greeks using Black-Scholes Model
Show steps
Practicing the calculation of Greeks using Black-Scholes Model will strengthen your understanding of the sensitivity of option value to variables such as underlying asset price, volatility, and time to maturity.
Browse courses on
Black-Scholes Model
Show steps
Show steps
Show steps
- Gather necessary data such as underlying asset price, volatility, strike price, and time to maturity.
- Input the data into the Black-Scholes Model and calculate option price.
- Calculate Greeks (Delta, Gamma, Theta, Vega, and Rho) using the appropriate formulas.
Write a blog post on a recent development in derivative pricing
Show steps
Writing a blog post on a recent development in derivative pricing demonstrates your understanding of the topic and allows you to share your knowledge with others, reinforcing your learning.
Show steps
Show steps
Show steps
- Research the latest developments in derivative pricing.
- Analyze the implications of these developments for investors and market participants.
- Write a clear and concise blog post summarizing your findings.
- Share your blog post on relevant platforms and engage with readers.
Develop a portfolio of derivative investments
Show steps
Creating a portfolio of derivative investments will not only enhance your understanding of derivative pricing but also provide you with practical experience in managing risk and optimizing returns.
Browse courses on
Portfolio Management
Show steps
Show steps
Show steps
- Research different types of derivatives and their risk-return profiles.
- Develop an investment strategy aligned with your financial goals and risk tolerance.
- Select and purchase derivatives to create a diversified portfolio.
- Monitor the portfolio regularly and make adjustments as needed.
Develop a model to quantify the risk of a derivative portfolio
Show steps
Developing a model to quantify the risk of a derivative portfolio will enable you to identify and manage potential risks, enhancing your ability to make informed investment decisions.
Browse courses on
Risk Management
Show steps
Show steps
Show steps
- Gather historical data on the underlying assets and derivatives.
- Choose appropriate statistical and econometric techniques to model the risk.
- Develop a model that can estimate the VaR, Expected Shortfall, and other risk measures.
- Validate the model and implement it to manage the risk of the portfolio.
Career center
Learners who complete Advanced Topics in Derivative Pricing will develop knowledge and skills
that may be useful to these careers:
Financial Engineer
Financial Engineer
A Financial Engineer develops and implements innovative financial solutions. A good understanding of derivative pricing and risk management is vital in this field. This course covers advanced topics such as implied volatility, volatility surface, and credit derivatives, giving you a strong foundation to excel in this role. It will equip you with the skills and knowledge to create and evaluate complex financial products and strategies.
Hedge Fund Manager
Hedge Fund Manager
As a Hedge Fund Manager, you manage investment funds with the goal of generating high returns. This course covers topics in derivative pricing, such as implied volatility, volatility surface, and credit derivatives. These are crucial concepts for understanding and managing risk in complex financial markets and can provide a competitive edge in the hedge fund industry.
Risk Manager
Risk Manager
A Risk Manager plays an integral role in identifying and mitigating financial risks. This course will help build a foundation for success in this field through its exploration of risk management of derivatives portfolios. Modules focus on both Greeks approach and scenario analysis, providing you with tools and techniques to manage financial risks across portfolios.
Actuary
Actuary
Actuaries analyze the financial implications of risk and uncertainty. A strong foundation in derivative pricing can be highly beneficial in this role. This course covers advanced topics such as implied volatility, credit derivatives, and real options, which can help provide a deeper understanding of risk assessment and financial modeling for insurance and pension-related products.
Portfolio Manager
Portfolio Manager
As a Portfolio Manager, making decisions about investment strategies is crucial. This course will provide you with in-depth knowledge of derivative pricing and risk management strategies that can be used in making informed investment decisions. The course covers practical applications such as pricing and risk management of CDO portfolios, which can be highly valuable in managing investment portfolios in the financial markets.
Consultant
Consultant
Consultants provide expert advice to businesses and organizations. This course covers advanced topics in derivative pricing and risk management, which can be valuable for providing consulting services in finance and risk management. The course provides practical knowledge of pricing and hedging strategies, which can be applied to a wide range of consulting projects.
Private Equity Investor
Private Equity Investor
Private Equity Investors manage and invest in private companies. This course covers advanced topics in derivative pricing, such as credit derivatives and structured products, which can provide valuable insights into assessing and managing risk in private equity investments. You will learn about CDOs, Gaussian Copula models, and other complex financial instruments commonly used in private equity.
Quantitative Analyst
Quantitative Analyst
A Quantitative Analyst is often heavily involved in statistical modeling and building models to analyze data. This course on Advanced Topics in Derivative Pricing provides a great foundation in Black-Scholes model and Greeks, which can help you develop risk modeling and derivatives pricing expertise. You will learn how to analyze complex financial instruments and make informed decisions.
Economist
Economist
Economists study and analyze economic data and trends. Understanding derivative pricing is becoming increasingly important for economists, as derivatives are widely used in financial markets and play a significant role in the global economy. This course provides a solid foundation in derivative pricing, including topics such as implied volatility and real options, which can enhance your ability to analyze economic data.
Investment Banker
Investment Banker
As an Investment Banker, you need a comprehensive understanding to provide financial advice to clients. This course covers advanced topics in derivative pricing, including volatility surface, credit derivatives, and real options. These are essential concepts that can significantly enhance your ability to analyze and value complex financial instruments, making you a valuable asset in the investment banking industry.
Financial Analyst
Financial Analyst
As a Financial Analyst, you often provide deep insights and recommendations based on quantitative and qualitative data. This course on Advanced Topics in Derivative Pricing will equip you with the skills to analyze derivative pricing and will help you better understand and value complex financial instruments. The course will also provide you with a solid foundation in risk management and hedging, which is essential for professionals in this field.
Venture Capitalist
Venture Capitalist
Venture Capitalists provide funding and support to early-stage companies. This course covers topics in derivative pricing and real options, which can be helpful in evaluating the potential of startups and making investment decisions. You will learn about methods such as dynamic programming to analyze investment strategies and make informed decisions.
Data Scientist
Data Scientist
A Data Scientist develops and applies statistical and machine learning techniques to solve complex problems. This course covers advanced topics in derivative pricing, which can provide a solid foundation in statistical modeling and data analysis. You will learn techniques such as dynamic programming in real options, which can be used to solve complex optimization problems in a variety of industries.
Trader
Trader
As a Trader, you will constantly manage risk. The risk management segment of this course on Advanced Topics in Derivative Pricing will help establish the foundation to thrive as a Trader. The crux of your role is to manage portfolios, and through this course, you will learn how to price portfolio derivatives and understand credit derivatives in a complex financial services landscape.
Professor
Professor
Professors teach and conduct research in their field of expertise. This course in Advanced Topics in Derivative Pricing provides specialized knowledge that can be valuable for teaching and research in finance and risk management. The course covers advanced concepts such as implied volatility, credit derivatives, and real options, which are important areas of research in financial academia.
For more career information including salaries, visit:
OpenCourser.com/course/m7xbe5/advanced
Reading list
We've selected ten 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
Advanced Topics in Derivative Pricing.
Is considered by many to be the standard textbook on options and derivatives and is often used at the graduate level. It provides an excellent overview of the pricing and risk management of derivative instruments.
Save
More advanced treatment of derivative pricing, focusing on the latest developments in the field. It valuable resource for anyone who wants to stay up-to-date on the latest pricing techniques.
Provides a detailed look at structured credit products, including the history, structure, and pricing of these products. It valuable resource for anyone who wants to learn more about structured credit products.
Save
Provides a comprehensive overview of energy derivatives, including the pricing and risk management of these products. It valuable resource for anyone who works in energy derivatives or wants to learn more about them.
Save
Provides a comprehensive overview of real options, including the theory and practice of these options. It valuable resource for anyone who wants to learn more about real options.
Provides a detailed look at the Black-Scholes model, including the history, theory, and applications of this model. It valuable resource for anyone who wants to learn more about the Black-Scholes model.
Provides a detailed look at option pricing and volatility, including the history, theory, and applications of these concepts. It valuable resource for anyone who wants to learn more about option pricing and volatility.
Save
Provides a detailed look at the volatility smile, including the history, theory, and applications of this concept. It valuable resource for anyone who wants to learn more about the volatility smile.
Provides an introduction to real options, including the history, theory, and applications of these options. It valuable resource for anyone who wants to learn more about real options.
Provides a detailed look at the Black-Scholes model, including the history, theory, and applications of this model. It valuable resource for anyone who wants to learn more about the Black-Scholes model.
For more information about how these books relate to this course, visit:
OpenCourser.com/course/m7xbe5/advanced
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Effort
5-8 hours/week
Level
Intermediate
Via
Coursera
Institution
Columbia University
Instructors
Garud Iyengar
Ali Hirsa
Martin Haugh
Language
English
Transcripts
Español
Français
Português
Deutsch
Italiano
中文
العربية
한국어
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हिंदी
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آذربایجان دیلی
This course belongs to a
collection
called
Financial Engineering and Risk Management. It's comprised of five courses:
- Term-Structure and Credit Derivatives
- Introduction to Financial Engineering and Risk Management
- Optimization Methods in Asset Management
- Computational Methods in Pricing and Model Calibration
- Advanced Topics in Derivative Pricing (viewing)
Good to know
Develops Greeks, which are core tools for option pricing and risk management used in today's markets
Covers Credit Debit Obligation (CDO), which played an important part in the 2007 subprime mortgage crisis
Taught by Martin Haugh, Garud Iyengar, Ali Hirsa, who are recognized experts in the field of financial engineering
Examines quantitative methods used in energy and commodity financial engineering
Suitable for learners who want to develop a solid understanding of financial engineering techniques
Advises students to take a course in calculus and linear algebra before taking this course
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