In this course, some of the mathematical problems which have recently become important for the financial institutions will be described in a general and mathematically rigorous manner. The main aims of this course are to introduce some practical aspects of the mathematical finance and to present the mathematical formulations of practically important financial problems.
✔ Course description and aims
3. Are the course description and aims given using separate paragraphs? 4. Are they written from an instructor’s perspective?
In this lecture, following a brief introduction of some practical backgrounds two important topics after the financial crisis will be formulated: the multiple yield curve modeling and the XVA (short for ``X-Value Adjustment’’). As for the multiple yield curve modeling we will first overview the practical constraints due to the changes in the market environments and the derivative transaction terms, and then introduce the OIS discounting and the initial yield curve construction. After that, the generalized HJM model, which is capable of capturing the dynamics of various market bases under the arbitrage free condition, will be formulated by using the framework of the stochastic partial differential equations. Furthermore, we derive some popular interest rate models from the generalized HJM model and review their features. Regarding the XVA pricing, after a short discussion on the concept and the practical importance of XVA we will formulate XVAs based on the replication theory using the forward backward stochastic differential equations/non-linear partial differential equations. Finally, we will derive some practical formulas of XVAs from a general equation. As long as time allows we will review the CCP basis modeling and some numerical techniques of the forward backward stochastic differential equations.
・Understand how the probability theory and the mathematical finance are used in the financial institution
・Understand recent developments of mathematical finance in response to practical requirements such as financial crisis
・Be able to survey the recent hot topics of mathematical finance
・Get conscious about linkages of pure mathematics to the real world
✔ Applicable | How instructors' work experience benefits the course |
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The lecturer has been working in a financial institute as a quants. |
Arbitrage free pricing theory, Replication theory, HJM model, OIS discount, Multiple yield curve, Stochastic partial differential equation, XVA, Forward-backward stochastic differential equation
✔ Specialist skills | Intercultural skills | Communication skills | Critical thinking skills | Practical and/or problem-solving skills |
This is a standard lecture course with the presentation slides and black boards. There will be some assignments.
Course schedule | Required learning | |
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Class 1 | Overview of the lecture | Details will be provided during each class |
Class 2 | Quick review of the foundation of Mathematical Finance | Details will be provided during each class |
Class 3 | Construction of the multiple yield curve model under the no arbitrage condition using SPDE | Details will be provided during each class |
Class 4 | Derivation of the generalized XVA formulas using FBSDE 1 | Details will be provided during each class |
Class 5 | Derivation of the generalized XVA formulas using FBSDE 2 | Details will be provided during each class |
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・A general HJM framework for multiple yield curve modelling (Christa Cuchiero, Claudio Fontana, Alessandro Gnoatto, 2016)
・Arbitrage-free XVA (Maxim Bichuch, Agostino Capponi, Stephan Sturm, 2016)
Assignments (100%).
None in particular