Fixed Income and Credit (2019-2020)

Prof. Ben Hambly
Course Term: 
Course Overview: 

This course examines fixed income markets in which participants are
essentially concerned with the time value of money. We look at market
conventions and describe the principal types of traded products. We
describe different approaches to modelling interest rates and the
resulting pricing and hedging of interest rate derivatives. There will
be some discussion of the changes since the financial crisis for fixed
income markets. We also consider some simple models for
credit risk and how credit is handled after the crisis.

Course Syllabus: 

Introduction to fixed income markets: interest rates, yield curves,
basic products (FRAs, bonds, swaps, caps, swaptions); modelling interest
rates; short rate models modelling under physical and risk-neutral
measures; diffusion models and term structure equation; affine models;
examples; two-factor models; forward rates models: Heath-Jarrow-Morton
(HJM) framework, bond prices and absence of arbitrage; market models:
change of numeraire, forward measures, LIBOR market models. Post crisis
changes, multi-curve models.

Introduction to credit markets: basic products such as CDS, reduced form
and structural models for default. An introduction to valuation adjustments.

Reading List: 

1) T Bjork: Arbitrage Theory in Continuous Time, Third Edition, OUP 2009
2) D Filipovic, Term-Structure Models, Springer 2009
3) M Musiela and M Rutkowski: Martingale Methods in Financial Modelling,
Second Edition, Springer 2005
4) S E Shreve: Stochastic Calculus for Finance II: Continuous-Time
Models, Springer 2004
5) P Schonbucher: Credit derivative pricing models, Wiley 2003

Please note that e-book versions of many books in the reading lists can be found on SOLO and ORLO.