Financial Engineering is a multidisciplinary field involving finance and economics, mathematics, statistics, engineering and computational methods. The emphasis of FE & RM Part II will be on the use of simple stochastic models to (i) solve portfolio optimization problems (ii) price derivative securities in various asset classes including equities and credit and (iii) consider some advanced applications of financial engineering including algorithmic trading and the pricing of real options. We will also consider the role that financial engineering played during the financial crisis.

We hope that students who complete the course and the prerequisite course (FE & RM Part I) will have a good understanding of the “rocket science” behind financial engineering. But perhaps more importantly, we hope they will also understand the limitations of this theory in practice and why financial models should always be treated with a healthy degree of skepticism.

Syllabus

WEEK 1: Mean-Variance Analysis and CAPM

WEEK 2: Practical Issues in Implementing Mean Variance

WEEK 3: Equity Derivatives in Practice: Part I

WEEK 4: Equity Derivatives in Practice: Part II

WEEK 5: Credit Derivatives and Structured Products

WEEK 6: Other Applications of Financial Engineering

WEEK 7: Background Material