Understand how to use derivatives to fit (almost) any desired payoff profile.
- Have a good understanding of derivatives;
- Is able to describe structured products;
- Is able to structure processes;
- Has understanding of structured credit products;
- Has understanding of related risk management issues.
- Is able to apply financial simulation techniques, and to report on the outcome according to standards of scientific writing.
A structured product is a combination of positions in one or more underlying assets and in several derivatives on the assets. Structured products are engineered to deliver customized return/risk profiles to answer the specific needs of a given investor. Some structured products are built to lower the holder’s tax liability (tax arbitrage) or to side-step regulatory constraints (regulatory arbitrage) but most respond to more fundamental economic needs. Users of structured products range from institutions to retail investors. Quick introduction to behavioural economics is thus included in the course material.
The course will first focus on the financial architecture of such products and the needs they are meant to answer. Then, we will turn to the issue of pricing and hedging such products. Some related risk management issues will be touched, and related simulation techniques will be addressed.
Finally, we will introduce new and exciting products, mainly equity derivatives credit derivatives, like CDS and CDO, which are default risk-based contracts increasingly used in structured products, as well as some insurance related products like bonds with embedded options and catastrophic bonds.
Assignment 1: 20%,
Assignment 2: 20%;
Minimum required score Exam: 5.0; Minimum required score Assignments: 5.0