Asset Pricing Theory and Portfolio Management

Objectives

The aim of this course is to provide an understanding of the valuation of financial assets, particularly non-linear products (derivatives) on equity and index underlyings, and their valuation methods (pricing models). The lexicon used will be given in both French and English. A project, begun in the workshop, will be carried out as a follow-up to the course. The workshops and the project will be carried out using Excel and C++.

Course outline

1. Vanilla products 
– Forwards and futures 
– Vanilla options 
– Exotic options

2. Black-Scholes model 
– Presentation of the model 
– Vanilla option price 
– Implied volatility surface: Garman-Kolhagen model 
– Limits of the model 

4. Heston model
– Presentation of the model 
– Model calibration 
– Model limits 

5. Dupire model
– Model presentation 
– Evolution PDE and model calibration 
– Model limitations 

6. Local and stochastic volatility model
– Presentation of the model 
– Evolution PDE and calibration
– Model limits 

Prerequisites

Introductory course on financial markets. Knowledge of traditional asset classes and stochastic calculus. Good use of Excel and C++.