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FIXED INCOME

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FIXED INCOME

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Academic year 2023/2024

Course ID
SEM0021
Teachers
Marina Marena (Lecturer)
Luca Martina (Lecturer)
Degree course
Finance
Insurance and Statistics
Year
2nd year
Teaching period
First semester
Type
Distinctive
Credits/Recognition
6
Course disciplinary sector (SSD)
SECS-S/06 - mathematical methods of economy, finance and actuarial sciences
Delivery
Formal authority
Language
English
Attendance
Obligatory
Type of examination
Written and oral
Prerequisites
Financial mathematics (for part 1 and 2), stochastic calculus and basics of derivative pricing (for part 2). ERASMUS students should contact marina.marena@unito.it to double check the required background.
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Sommario del corso

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Course objectives

 The purpose of the course is to discuss:

1) how to construct and manage a  fixed-income portfolio

2) how to model the term structure of interest rates

3) how to price and hedge interest rate derivatives

Fundamental mathematical tecniques will be presented. Practical applications will be greatly discussed.

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Results of learning outcomes

At the end of the course, the student is expected to be capable of:

  • understanding fixed-income markets and instruments
  • evaluating the impact of the determinants of interest rate movements
  • constructing and maintaining a fixed-income portfolio, and assessing its credit risk
  • constructing interest rate curves from marked data
  • pricing and hedging interest rate derivatives
  • applying the basic course knowledge to theoretical issues and concrete market situations
  • approaching the subject in a critical manner through the examination of different approaches in the literature and practice of the fixed-income market
  • having gained communication skills, through the debate during the lectures
  • having gained learning abilities, through a variety of learning tools (teaching material, class discussion, lab sessions, homework and tests)
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Program

 

Part 1 [16 hours] 

BOND ANALYSIS:
- Bond definition and characteristics
- Bond types
- Bond structure and priority
- Bond valuation
- Bond Return Measures (CY, YTM, YTC)
- Yield curve
- The effect of interest rate changes on bond prices
- Duration
- Determinants of Interest Rates
- Bond ratings and CRAs
- Bond spread
- Bond Yields
- Government Bonds

PORTFOLIO MANAGEMENT:
- Portfolio competition and market/strategy comments

Part 2 [32 hours]

INTEREST RATES DERIVATIVES: PRODUCTS AND MODELS

  • Spot and forward contracts
    - taxonomy of rates
  • Interest rate linear derivatives
    - FRA and swaps
  • Bootstrapping/interpolating the interest rate curve
  • Interest rate options
    - options on bonds
    - caps and floors
    - swaptions
  • The change of measure technique
  • Black's model and beyond
    - Black's model
    - Normal model
    - Shifted lognormal model
    - SABR model
  • Term structure modelling
    - Short rate models [Hull-White one-factor model]
    - HJM models [brief outline]
    - Libor Market Model
  • Hedging interest rate risk

 

 

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Course delivery

Lectures, class discussion and lab sessions. 

Slides and other course material will be made available on Moodle in due time.

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Learning assessment methods

Written closed-book exam lasting 2 hours. Maximum grade is 30/30 cum laude (1/3 on part 1 and 2/3 on part 2). Students can take the exam at most three times per academic year on a total of five exam sessions (December, January, February, June and September). More details can be found on Moodle. 

 

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Support activities

Compulsory homeworks will be assigned. Homeworks must be uploaded on Moodle. Deadlines will be posted on Moodle. 

Suggested readings and bibliography



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Book
Title:  
Interest Rate Models-Theory and Practice, with Smile, Inflation and Credit
Year of publication:  
2007
Publisher:  
Springer
Author:  
Damiano Brigo, Fabio Mercurio
ISBN  
Required:  
No


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Book
Title:  
Arbitrage theory in continuous time
Year of publication:  
2019
Publisher:  
Oxford Finance Series
Author:  
Tomas Björk
ISBN  
Required:  
No


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Class scheduleV

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