Option Area(s):

Course Description :

This class explores the analytical concepts required to price and manage the risks inherent in fixed income securities, with an emphasis on bonds, swaps, and Eurodollar futures contracts. In addition, we will discuss models of credit risk and applications of the methods developed in class for evaluating the risk in complex structured swaps and risky sovereign debt. Throughout, the emphasis in the class will be on practical applications of the analytical concepts to real data and securities. Additionally, there is a very strong focus throughout on risk management techniques.

From a broad perspective, understanding the risks inherent in fixed income securities is akin to understanding the risks inherent in managing the financial position of nearly any type of company. For example, banks and insurance companies must continually focus on managing their interest rate risk, prepayment risk, and credit risk. Large international corporations face exchange rate risk, as well as credit risk. This course focuses on these types of risk through practical applications such as duration and convexity hedging, hedging through the use of futures contracts, Value-at-Risk applications, and interest rate swaps. An understanding of these concepts is essential to a career in finance.

Using real data, we will focus on designing and modeling hedging techniques that are used by corporations and institutions facing the risks noted above: credit risk, interest rate risk, currency risk. I will supplement the text with a number of outside readings that illustrate and apply the concepts used in class. The modeling is excel-based, and we will work through a number of modeling techniques during class time. One of the goals of the course is to gain comfort in modeling complex financial transactions, and gaining a strong understanding of valuation techniques that may be applied to a number of financial instruments, not limited only to fixed income securities.

The grading of the course is as follows:

Final (take home) 35%

Problem sets 60% (20% each)

Class participation 5%

Problem sets typically consist of an analysis that will be completed using Excel, and a number of questions related to the results of the analysis.