Computational Finance and its Object Oriented Implementation (with Application to Interest-Rates and Hybrid Models)
Prof. Dr. C. Fries, Niklas Weber
Schedule and Venue
| Events | Date/Time | Room |
|---|---|---|
| Lectures Prof. Dr. Christian Fries | Kickoff lecture: Thu 17 October, 14:00-16:00 | online |
| Exercise Classes Niklas Weber | Wed, 16:00-18:00 First exercise class: TBD | Room B121 (Quantlab) Selected dates online |
| Group Collaboration Project Review | TBD (usually after written exam) | |
| Final Written Exam | TBD (usually in the week 10.02 - 14.02) |
The course will be organised via Moodle where you can log in using your LMU e-mail address (@campus.lmu.de). If you wish to participate, please sign up by sending an e-mail from your LMU e-mail address to Niklas Weber.
The course will be based on lecture videos and graded coding assignments during the semester. Videos are uploaded weekly and we recommend watching them in the former lecture slots (Thu: 14-16, Fri: 8-10). The exercise sessions allow for interaction and will focus on discussing the assignments and additional exam preparation.
Content
This lecture discusses the interplay of Theory, Modelling, Numerical Methods and Implementation in Mathematical Finance.
All aspects learn from each other: one needs to understand the theory to build models and good implementations. Studying numerical experiments gives deeper theoretical insight. Using the computer to understand math can be fun!
We discuss how to build an industry-grade implementation of our models and allow future extensions while being efficient. We discuss practical applications in the financial industry.
The lecture tries to be as self-contained as possible, but we will use some numerical methods developed in a previous course. We will start with a short recapitulation of the numerical methods needed for those who did not follow the last lecture. It is possible to consider most of these parts as “given” (“black box”). Don’t panic: We will assist you.
The lecture will discuss the theory and application of some prominent methods and models from mathematical finance. We focus on interest rate and hybrid models with high relevance for the financial industry. In an excursion, we consider a climate model (DICE), extend it and combine it with our interest rate models.We will then use our implication to gain a deeper understanding of the theoretical properties of the model.
If time permits, we conclude the lecture by discussing running our models in a cloud.
Tentative Agenda
- Recapitulation (Monte-Carlo Method, SDEs, etc.)
- Interest Rates, Linear Interest Rates Products
- Multiple Interest Rate Curve Modelling and its Implementation
- Interest Rate Options, Convexity Adjustment
- Discrete Term-Structure Models (formerly known as LIBOR Market Models) and their Implementation
- Model Calibration
- Valuation of Complex Derivatives
- Object Oriented Implementation, Definition of Model Interfaces
- Short Rate Models and their Implementation
- Climate Models
- Numerical Methods in the Context of Mathematical Finance
- Model Calibration: Optimization and Root-Finding
- Correlation Modelling: Prinzipal Component Analysis and Factor Reduction, Regression Methods
- IT Implementation of Models, e.g. in the Cloud
- revision control systems (git)
- unit-testing (junit)
- build management (maven, gradle)
- continuous integration (TravisCI, Jenkins)
Target Participants: Master students in Mathematics or Financial and Insurance Mathematics.
Pre-requisites: The lecture requires some basic knowledge on stochastic processes. The knowledge of an object oriented programming language is advantageous. Although the lecture tries to be ”self-contained” whenever feasible, the knowledge of the previous courses (”Numerical Methods in Mathematical Finance” or ”Introduction to Interest Rates and the LIBOR Market Model” and our ”Introduction to Java”) will be useful.
Applicable credits: Students may apply the credits from this course to:
- WP15 or WP23 for the Master Finanz- und Versicherungsmathematik PO 2019
- WP14 or WP22 for the Master Finanz- und Versicherungsmathematik PO 2021
- WP28 or WP26 for the Master Mathematik
[1] Fries, Christian P.: MathematicalFinance: Theory, Modeling, Implementation.Wiley, 2007. ISBN 0-470-04722-4.
[2] Brigo, Damiano; Mercurio, Fabio: Interest Rate Models - Theoryand Practice. Springer-Verlag, Berlin, 2001. ISBN 3-540-41772-9.
[3] Baxter, Martin W.; Rennie, Andrew J.O.: Financial Calculus: An introductionto derivative pricing. Cambridge University Press, Cambridge, 2001. ISBN 0-521-55289-3.
[4] Eckel, Bruce: Thinking in Java. Prentice Hall, 2003. ISBN 0-130-27363-5.
[5] Hunt, P.J.; Kennedy, J.E.: Financial Derivatives in Theory and Practice. John Wiley&Sons, 2000. ISBN 0-471-96717-3.
[5] Oksendal, Bernt K.: Stochastic differential equations: an introduction with applications. Springer-Verlag, 2000. ISBN 3-540-64720-6.