Interest Rate Models and Credit Derivatives

Recommended Prerequisites

Stochastic Processes and Calculus. Derivative Financial Instruments. Knowledge of the English language is recommended

Teaching Methods

Classes have both a lecture and a tutorial component. The contents of the syllabus are exposed with the aid of slides based on the bibliographical references indicated. Students are strongly incentivated to participate. Skills acquired are consolidated by means of resolution of exercises. Students are asked to present a work in the field of credit risk, with both a synthesis and a research component. Guidance is provided such that the objectives proposed can be better achieved.

Learning Outcomes

After concluding this curricular unit, the student should be familiar with the different concepts of interest rates as well as several financial assets that are sensible to changes of interest rates. Additionally, the student should broadly understand how the fixed income market works and be capable to deduce the term structure of interest rates. It is further expected that the student will be able to employ different theoretical models either for the dynamics of the interest rates and the analysis of credit risk. Finally, the student should be familiar with various credit derivatives and understand their relevance in recent credit crisis

Work Placement(s)

No

Syllabus

Bonds, interest rate risk and term structures. One factor non-arbitrage equilibrium models of interest rates. Heath-Jarrow-Morton (HJM) methodology. LIBOR market models. Corporate bonds. Credit risk models. Credit risk derivatives

Head Lecturer(s)

Ana Margarida Machado Monteiro

Assessment Methods

Assessment
Project: 30.0%
Exam: 70.0%

Bibliography

T. Bielecki, Credit risk: Modeling, valuation and hedging, Springer-Verlag, 2002.

T. Bjork, Arbitrage theory in continuous time, Oxford University Press, 1998.

F.J. Fabozzi, Bond markets, analysis, and strategies, Prentice Hall, 1989.