Fixed Income Derivatives

1.5 units

This is an advanced course in fixed income, focusing on risk-neutral model-based pricing of fixed-income securities. We will cover both analytic and Monte Carlo pricing of various types of fixed-income derivatives, including caps/floors and swaptions, in the context of key factor models of the swap term structure and LIBOR Market Model (LMM). Students will apply the theory in a practical group project by calibrating Bloomberg data to interest rate models. In addition, an introduction to the Local Volatility and Stochastic Volatility LMM (SABR) models, as well as the basic frameworks of structural and reduced-form credit-risk models, will be provided. We will briefly consider how to use these models to price various types of exotic interest rate derivatives, credit-risky bonds, and credit-default swaps commonly seen in practice. Practitioner-focused real-life applications and recent market developments (OIS, CVA) will also be discussed. Finally, a modeling bridge is introduced that connects the LIBOR-based framework to the SOFR-based derivatives.