Students will work with Excel or more sophisticated computer program (Matlab, C++, Fortran) if they wish. They will be asked to solve different problems during the course. Firstly, they will have to price corporate warrants using only market data. They will have to use Solver (or the equivalent routine) to look for the correct price of this derivative product. The second practical exercise will be to price exotic path-dependent options using Monte Carlo simulation. Students will be asked to price barrier options (turbo-warrants and turbo-pro-warrants), lookback options and/or Asian options. They will have the opportunity to apply variance reduction techniques, such as the use of antithetic variables. A third activity will be the design of a real structured product (a guarantee investment fund really offered by an investment company). To this end, the students will have to combine and price different path-independent options (digital options, asset-or-nothing options, gap options, etc.) with standard options. They will be asked to present in class their solution for the construction of the proposed structured product. In the same way, students will also be asked to price swaps, caps and swaptions similar to the ones really traded on the market.
Students will be allowed to work on these activities alone, although it will be encouraged to work in small teams (2 or 3 people). Previously to each activity, the professor will explain in class the theoretical background needed to perform each task and will provide hints to work on the activities in an efficient way. After handing-in each exercise, in a weekly basis, it will be discussed in class the difficulties that students have found to do the activity and the correct way to do it.