MBA Analytic Finance

This course covers the analytical and numerical methodologies applied by hedge funds and derivatives trading desks to price complex derivative securities and devise arbitrage strategies. In a world of increasingly higher sophistication, the valuation of complex derivative securities and the design of arbitrage strategies require the understanding and application of advanced models of option pricing, and their application to real data. This course emphasizes both and provides students with real-world problems to solve.

This quantitative course presents advanced material relevant for portfolio managers, extending the material covered in Investments. Topics include the money management industry (mutual funds, pension funds, hedge funds), modern techniques for optimal portfolio selection, liquidity and transaction costs, properties of asset returns, and investment strategies designed to exploit apparent violations of market efficiency.

There has been a proliferation of new products and investment strategies in the asset management space in recent years. This course applies portfolio theory to understand and evaluate these products and strategies in the context of the empirical evidence about return patterns across assets (i.e., the factors such as value/growth, momentum, low volatility, and carry that drive returns) in multiple markets/asset classes (e.g., US and international equities and bonds, currencies, and commodities).

This course covers state-of-the art models and techniques required to analyze fixed-income instruments, and their derivatives, in modern financial markets. By the end of the course, students will learn 1) the basic concepts of fixed-income instruments, such as yield, duration, and convexity; 2) the modern empirical methodologies to describe Treasury and corporate bond data, such as “curve fitting,” factor analysis, and default probabilities; 3) the most recent modeling techniques for fixed-income derivative products used in the street, such as the models of Vasicek, Cox Ingersoll, and Ross; Ho and Lee; Hull and White; Black-Derman-Toy; and Heath-Jarrow-Morton; and, importantly, 4) how to use these models in practice to value both traditional derivative instruments—such as swaps, bond options, caps, and floors—and more recent products, such as inverse floaters, range notes, mortgage backed securities, and credit derivatives. The key feature of Fixed-Income Asset Pricing is that it strongly emphasizes the applications of these models to value real-world fixed-income products, and their derivatives, by focusing both on the practical difficulties of applying models to the data, as well as on the necessity to use computers to compute prices.

Financial risk management is reported to be the main reason for the use of financial derivatives by nonfinancial institutions. This course has two main objectives. The first is to cover techniques to identify, measure, and manage corporate financial risk, as modern financial markets and regulation require. Specifically, topics of discussion will include dynamic hedging and portfolio replication, the development of value-at-risk, and the management of exchange-rate risk, interest-rate risk, credit risk, and operation risk. The second main objective is to build a framework to integrate financial risk–management solutions with long-term corporate strategy. We will discuss cases where the use of financial engineering was vital for the success of a business strategy. Typical applications in this case include privatizations, mergers and acquisitions, and financing strategies, among others. However, the course will focus more on the uses of derivative securities rather than their technical aspects.