8348 - ADVANCED DERIVATIVES

The course is aimed at gaining a more advanced knowledge of financial derivatives with respect to a basic course of derivatives. The course content is organized as follows. The first part focuses on the most popular models for the pricing of equity derivatives, beyond the basic Black-Scholes model. In particular, we focus the attention on those models aimed at explaining the volatility surface. The second part of the course deals with the analysis, from both a theoretical and an empirical perspective, of the most popular credit derivative and structured instruments. In both parts, the theoretical discussion of the most common pricing models is integrated with practical implementation of the models based on empirical data.

• The limits of the Black-Scholes model for the pricing of equity derivatives. Implied volatility and its empirical features.
• Extensions to the Black and Scholes formulation: stochastic volatility models.
• A brief introduction to volatility / variance derivatives and their pricing techniques.
• Credit derivatives: market, players, instruments. Single-name Credit Default Swaps and their pricing.
• Structured credit derivatives: synthetic CDOs and Index tranches.
• How to price correlation products: the Gaussian copula model and its extensions.
• Some common trading strategies on credit derivatives.

Student evaluation consists of an empirical assignment and a final written exam. The empirical assignment accounts for 30% of the final mark, while the final written exam accounts for 70% of the final mark.

The empirical assignment may be produced either by individuals or by groups of students composed by up to four people.

• The course material includes academic papers, slides and other notes that are available on the weblearning space.
• For additional reference, we suggest: J. GATHERAL, The Volatility Surface: A Pratictioner's Guide, Wiley, 2006; J. SCHÖNBUCHER, Credit Derivatives Pricing Models, Wiley, 2003.

Students are expected to have some basic knowledge of stochastic calculus and to have attended a basic course of financial derivatives.