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This course builds on the techniques learned in Quantitative Methods for Derivative Pricing. The focus of the course is a deeper analysis of numerical and computational issues in pricing and calibration. The orientation of the course is hands-on, with heavy use of computational techniques applied to case projects. Classroom activity will combine lectures with detailed discussion of case projects. The primary objective of this course is to prepare students to tackle the latest challenges in quantitative pricing that they are likely to encounter in cutting edge financial institutions. The material presented will familiarize students with state of the art computational strategies for the calibration of pricing frameworks, and for the pricing of complex and multidimensional derivatives. The course will be based on case projects, representative of real life situations as encountered in top trading operations in equities and fixed income. Some of the topics of emphasis will include implying local volatility functions, understanding the role of stochastic volatility models, pricing structures with complex embedded options, and credit derivatives.

NOTE: A minimum grade of A- in the prerequisite courseDerivatives: Quantitative Methods ( 3 units )  is required to enroll in this elective

Success and Failure in Financial Innovation (1 unit) - John O'Brien

Students will participate in a series of case studies illustrating some of the major successes and failures of modern financial innovation.

The Design of Securities for Corporate Financing (1 unit) - Mukesh Bajaj

The view of corporate finance presented in this course stems from an analysis of two related issues: 1) how firms create value, and 2) how corporate finance facilitates the process of value creation. As part of this process, we will examine the factors that help determine financial strategy, thereby putting the design of financial packages in perspective. In particular, the course focuses on how corporate financing needs lead to the need for financial engineering and spur financial innovation. The course will use lectures and case analysis.

Credit Risk: Quantitative Modeling (1 unit) - Jeffrey Bohn

The second course in the credit risk series, this course will build on the foundation provided in the first course and provide a more in-depth presentation of how models are derived, estimated, and modified. This course is targeted toward students with strong backgrounds in mathematics and statistics. The course will cover default probabilities, loss given default, correlation, credit portfolio analytics, bond valuation, loan valuation, and credit derivative valuation. Emphasis will be placed on model building, model validation, and interpreting model output. Students will be required to do some high-level programming in a package such as Matlab. Some empirical testing exercises will also be part of the project work. The second course in the credit risk series, this course will build on this foundation and provide a more in-depth presentation of how models are derived, estimated, and modified.

Equity & Currency Markets (2 units) - Richard Lyons and Ron Kahn

This course reviews various aspects of equity and currency markets and provides models of and historical evidence on the average returns and volatility of returns on equities, on the trade-to-trade equity price behavior, on trading volume and patterns, and on primary financial risks. The determination of spot and forward exchange rates and the volatility, volume, high frequency dynamics, and dealer behavior in currency markets are considered. Practical considerations involved in the implementation of various strategies are considered.

Choose 7 units of coursework:

Asset-backed Security Markets (2 units) - Nancy Wallace and Dwight Jaffee

This course extends the study of fixed-income securities to advanced topics on mortgage and other asset-backed securities. Students will apply the latest tools in fixed-income analysis and classic models in economics and finance to a critical evaluation of the structure and operation of the securitized bond markets. The course covers the basic mechanics of structuring deals for mortgage-related securities, credit cards, leases, and other debt markets and the risk management techniques employed in the securitization process for these assets. The course will also consider the valuation of pooled assets and derivative bonds using both Monte Carlo and option pricing techniques, an analysis of the trading strategies that are employed in these markets, and a study of the market microstructure of asset-backed security markets.

Dynamic Asset Management (2 units) - Hayne Leland

This course reviews portfolio theory and pricing models, risk models for international portfolio returns, models of optimal allocation of funds, role of exchange rate uncertainty, and criteria for judging the performance of managers and models. It includes different types of portfolios/instruments (equity, fixed income, currency, mortgages, non-traded assets) and different types of applications (investment funds, pension funds, insurance companies, bank investment portfolios, etc.). This course examines how strategies that systematically change exposure to different assets can achieve various investment objectives.

Behavioral Finance (2 units) - Terry Odean

Over the last 25 years, psychologists have come to better understand the processes by which people make judgments and decisions. They have identified common judgment and decision heuristics and the biases associated with these. An understanding of one's own decision biases and those of others is an important tool for managers. Behavioral Decision Theory has also contributed to our understanding of financial markets. This course discusses the common biases and heuristics identified by psychologists. Topics will include overconfidence, the attribution theory, the representative heuristic, the availability heuristic, anchoring and adjustment, fairness, and prospect theory. We will try to gain an understanding of how these biases affect managers, investors, and financial markets.

Advanced Corporate Finance (and Real Options) (2 units) - Christopher Hennessy

Investment

Textbook suggested: Investments, 7th Edition, by Bodie, Kane and Marcus, Irwin, 2006

business/finance/bkm/index.html 

Online Resouce: john.cochrane  

lecture notes: john.cochrane/research/Papers/notes.pdf 

icb/icb.do?keyword=k7745 

Applied Finance Project (Required) (1 - 3 units)

This is an applied project exploring an unresolved finance problem that is met in practice and involves the development or use of a quantitative financial technique. Participation requires prior approval of the supervising faculty member.

Independent Study (1 - 3 units) - Richard Stanton and Nancy Wallace

The MFE program requires satisfactory completion of 28 units of coursework. In addition to coursework, the MFE educational experience includes the following:

Financial Practice Seminars: MFE students are encouraged to attend weekly discussions held by finance practitioners. In the first term speakers discuss jobs available to graduates of the MFE and the skills needed to contribute to a firm's mission. In the second term, speakers provide insights into the way the financial world is changing: new products and needs; evolving data and information systems; and similar topics.

Applied Finance Project: MFE students are required to complete an applied finance project that develops or uses quantitative finance tools and techniques learned in the program or internship.

Internship Program: While not required for graduation, students are encouraged to have an internship during the break from mid-October to mid-January. The MFE Office and the Haas Career center work with students to locate opportunities for students.

Resource

1.      Overview: events/FinancialEngineeringOverview.pdf 

2.      Video£º2007/01/12553/L01/index.shtml 

3.      Working Papers: MFE/papers.html  

~benninga/wiener.html  

4.      Detailed Syllabi: courses/Syllabi 

finance/academic.cfm?doc_id=1226 fen48/spec-report/capstone/capstone.html 

5.      Fund Management notes: ~musto/funding.html

6.      interest rate derivative£º

Articles from US Fed:

Instructions for the Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 2007

derivative instruments 2005

Do Nonfinancial Firms Use Interest Rate Derivatives to Hedge? 2005. publications/economicperspectives/2001/3qepart4.pdf

7.      Recommended Reading for The Master's program in Financial Mathematics in University of Chicago

Below is a list of recommended texts (several of which will be used in the program). The book by Boas contains most of the mathematics that entering students should be familiar with, while the early chapters in Hull's book are a good introduction to the financial products that are the basis of study for the program.

Author

Title

Mary L. Boas

Mathematical Methods in the Physical Sciences

Sebastien Bossu and Philippe Henrotte

Finance and Derivatives: Theory and Practice

John C. Hull

Options, Futures and Other Derivatives

Neil A. Chriss

Black-Scholes and Beyond: Option Pricing Models

P. Wilmott, S. Howison, J. Dewynne

The Mathematics of Financial Derivatives

Patrick Billingsley

Probability and Measure

Jonathan E. Ingersoll, Jr.

Theory of Financial Decision Making

Tim Weithers

Foreign Exchange: A Practical Guide to the FX Markets