|It is a fact that derivatives' markets have been growing fast in the past decade. As of December 2010, the total notional of over-the-counter derivatives was $600 trillion, a 40% increase over its value in December 2006. A similar expansion was registered by the credit derivatives market, which stood at $30 trillion (notional) at the end of 2010. Although both the global derivatives market and the credit derivatives market experienced a decline during the 2008 financial crisis, there is little doubt that they will play a major role in the future. For instance, likely the largely unregulated credit derivatives market will become more regulated, possibly moving to a regulated exchange, but their function as providing insurance on default is too important for it to disappear. The current financial crisis has generated also large trading opportunities, as the dislocation of capital increased the spreads across the board, and numerous apparent “almost arbitrage” opportunities appear available to whoever has capital to invest and the expertise to capture them.
This course covers the analytical and numerical methodologies applied by hedge funds and derivatives trading desks to price complex derivative securities and devise arbitrage strategies. We will apply these methodologies to several case studies, whose topics range from relative value trades in equity options and fixed income instruments, to the pricing of convertible securities using numerical methods.
In a world of increasingly higher sophistication, the valuation of complex derivative securities and the design of arbitrage strategies require the understanding and application of advanced models of option pricing, and their application to real data. This course emphasizes both, and provides students with real world problems to solve.
More information is available on the course homepage http://faculty.chicagobooth.edu/pietro.veronesi/teaching/BUS439/35132_syllabus.pdf.