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Financial Engineering


Mele A.

Course director

Pankratov A.



This course provides a grounding in recent developments into the market practice of trading volatility in equity, interest rate and credit markets.

Description / Program
By the end of the course, the students will be familiar with a variety of topics, including (i) stochastic volatility (the fact the asset price volatility changes over time); (ii) local volatility (the fact that we may price and hedge exotic derivatives while only relying on already traded plain vanilla derivatives; (iii) expected volatility (the views on the possible occurrence of periods of market turmoil). Expected volatility may be traded through dedicated instruments; it does represent indeed one of the most actively traded asset classes in liquid markets. The students will be familiar with the main concepts, trading tools and instruments in this space, such as: (iv) the equity VIX index (the “fear index” maintained by Chicago Board Options Exchange); (v) options and futures referenced to VIX and their basic pricing models; (vi) fear indexes available for other asset classes such as interest rate swaps, government bonds and credit indices. Finally, the students will be exposed to (vii) tutorials on endogenous volatility, that is, the occurrence of large swings in asset prices resulting from the uncoordinated behavior of market participants in periods of turmoil. These price swings may feed such violent market fluctuations (crashes followed by rebounds) that may likely wash away some of the volatility strategies described in (v)-(vi).

Learning Method / Style of Lessons
Face-to-face lectures
Exercise Sessions

Exam Style
In class final

References: An extensive and dedicated array of Lecture Notes distributed in class. Parts of these notes are taken from a forthcoming book of the lecturer, and the remaining part results from executive education the lecturer has provided in the last five years in venues such as RISK-USA or Chicago Board Options Exchange.