Fixed Income and Credit Derivatives

Introduction to Fixed Income: Interest Rates, Fixed-Income Instruments, Basic ideas of pricing fixed-income products. Term Structure Models: Nelson-Siegel-Svensson, Cubic Splines, Parameter Forecasting. Interest Rate Derivatives: Callable Bonds, Interest-Rate Caps and Floors, Swaptions. Short-Rate Modelling: Introduction to models like Vasicek, Cox-Ingersoll-Ross, Ho-Lee. Interest-Rate Trees. Credit derivatives: Institutional background, common instruments and indices, market conventions; Credit Ratings; Fundamental concepts of credit-risk modelling. Rating-based models: Transition probabilities, migration matrices, Markov chains and generator matrices; Simulation; Pricing. Structural models: Merton model, risk structure of credit spreads, seniority structure; Simulation. Black-Cox model, KMV model; Capital structure. Intensity models: Discrete-time martingale models and implied pricing probabilities; Building blocks for pricing. Poisson processes, constant and deterministic default intensity; Cox processes, stochastic default intensity and affine models. Factor models: Concepts, conditional default probabilities, loss distributions, risk parameters, scenario stress-testing. CDO pricing: Homogeneous large portfolios and Gaussian copulas, tranche pricing; Compound, base and implied correlations; Bootstrapping

Mode of delivery

face to face

Type

compulsory

Planned learning activities and teaching methods

Interactive teaching (lecture and discussion), solving exercises with pencil and calculator during the course. Optionally, MS Excel or a programming environment like GNU/R can be used by the students.

Assessment methods and criteria

The grade will depend on the final exam (70%) and three take-home assignments plus class participation (10% each). The first assignment will be handed out in Class 1 and be due for Class 2; the second assignment will be from Class 3 to Class 4; the third assignment is provided in Class 5 and discussed in Class 6. The final exam will last 90 minutes and focus on understanding and applying the concepts and methods rather than straight reproduction.

Prerequisites and co-requisites

Courses in quantitative methods

Infos

Degree programme

Quantitative Asset and Risk Management (Master)

Cycle

Master

ECTS Credits

4.00

Language of instruction

English

Curriculum

Part-Time

Academic year

2023

Semester

1 WS

Incoming

Yes

Learning outcome

Successful students are able to define various fixed income and credit derivatives, comment on their possible usage in asset and risk management and determine prices for them by applying different pricing models. They can paraphrase the no-arbitrage principle and relate it to pricing derivatives. Additionally, they are able to debate the validity of pricing models in real world markets and use simulations and stress testing to critically analyse possible shortcomings of the models.

Course code

0613-09-01-BB-EN-08

Fixed Income and Credit Derivatives