Implementing Quantitative Techniques

In a complicated financial world a detailed understanding of the application of quantitative techniques is essential. This course provides an in-depth coverage of practical quantitative methods important in today's financial markets.

Course Objectives

To provide practitioners with a practical understanding of how a range of tools can be used to manage, analyse and price financial instruments. Participants will study:

• Principal components
• Duration and the impact of convexity
• Methods of interpolation, their uses and limitations
• Regression techniques
• Implementing Monte Carlo simulations
• Binomial and trinomial tree building
• How to model assets and price derivatives in continuous time

Anyone who needs to understand a comprehensive set of tools for managing risk in the financial markets. The seminar will be of special interest to:

• Risk managers
• System developers
• Traders and derivatives teams
• Consultants and brokers

Basic understanding of financial markets and probability (also covered in Maths Refresher).

Bootstrapping Yield Curves

• The form of the discount function
• Methods of interpolation
• OIS, Term Rates and N-way curve building
• Maximum smoothness
• Cubic splines in detail
• Interpolation and the forward curve

Workshop: Interpolation, forward curves and pricing

Curve Building Techniques for Use with Limited Data

• Applying multiple regression to bond data
• Finding a functional form for the yield curve
• Basis splines and other approximating functions
• Econometric issues
• Extension to credit and inflation curve building

Workshop: Building a bond market yield curve

Principal Components and Yield Curve Hedging

• Review of single and two-factor duration
• Principal components
• Using principal components with B-splines to derive hedging factors
• Bond arbitrage and portfolio immunisation

Workshop: Portfolio Immunisation

Modelling Movements in Asset Prices: Monte Carlo Simulation

• Asset prices represented by Brownian motion
• Monte Carlo simulation
• Random number generation
• Control variate and antithetic variable techniques
• Low discrepancy sequences
• Multiple dimensions and stochastic volatility
• Simulating SABR processes

Workshop: Building and Running a Monte Carlo Simulation

Modelling Movements in Asset Prices: Trees

• Alternative futures
• Probabilities and pseudo probabilities
• The binomial tree
• Trinomial trees
• Trees and Monte Carlo
• Risk neutral valuation
• Valuing standard options

Workshop: Building a binomial tree for pricing and hedging

Using Trees for Pricing Derivatives

• Early exercise and Bermudan structures
• Deriving the “Greeks”
• Modifications for Smile and Skew

Modelling Asset Prices in Continuous Time

• Some basic stochastic calculus and Ito's Lemma
• Normal and lognormal distributions
• Applying the Black-Scholes analysis
• Finite difference techniques for continuous time problems

Workshop: Comparing binomial trees and Monte Carlo techniques