Derivative Pricing – Advanced


The course begins with a review of pricing using the traditional binomial tree method and then moves on to present how these instruments may be priced using the efficient Binomial tree approach. The Monte Carlo simulation approach is used to prices vanilla and exotic options and convergence and variance reduction techniques are presented for improving the accuracy and time to convergence of the results.

Next, a step by step walkthrough of how to price structure products such as interest rate swaps, cross currency swaps, interest rate options, accruals swaps, range accrual notes and commodity linked notes is given, from the derivation of the interest rate term structure to the discounting of cash flows to determine the value of the instruments.

It concludes with a brief overview of various other advanced products including structured and credit products.

This course consists of six lessons:

  • Lesson 1 – Binomial Trees – Efficient Approach
  • Lesson 2 – Convergence and Variance reduction techniques for option pricing models
  • Lesson 3 – Pricing Exotic Options using Monte Carlo Simulation
  • Lesson 4 – How to determine Spot Rates and Forward Rates & Yield to Maturity
  • Lesson 5 – Advanced Fixed Income Securities
  • Lesson 6 – Other Advanced Products

After taking this course you will be able to:

  • Construct a Binomial tree using Mark Broadie’s efficient approach
  • Price vanilla and exotic options using this tree
  • Price exotic options using the Monte Carlo simulation approach
  • Apply convergence and variance reduction techniques to improve the accuracy of Monte Carlo simulation results
  • Derive spot rates, forward rates and yield rates
  • Define cash flows and interest rates and identify the differences between spot rates, forward rates, short rates, yields to maturity
  • Outline the process for determining the value of a swap
  • Derive an term structure of interest rates and utilize it to project cash flows and discount payments
  • Price interest rate swaps, cross currency swaps, interest rate options (caps and floors), accrual swaps, range accrual notes and commodity linked notes
  • Define other structured and credit products

The candidate should be familiar with basic derivative products and their pricing and be comfortable with basic mathematics, statistics, probability, and EXCEL.

The Derivatives Pricing Basic course is a necessary prerequisite for this course.

The course is aimed at professionals who deal with pricing, valuation and risk issues related to structured fixed income and foreign exchange transactions.