Duration: 2 days
- Yield Curve Estimation
- Advanced Cash Flow Analysis
- Historical Simulations
- Scenario Analysis and Stress Testing
- Monte Carlo Simulation
- Pricing Complex Instruments
- Principal Components Analysis
At this advanced-level workshop, participants will learn how to develop and implement advanced
financial models in MICROSOFT™ Excel™ and Visual Basic™ for Applications. We shall start with the
estimation of yield curves and advanced cash flow analysis. Participants will learn how to “bootstrap”,
smooth and interpolate the swap-curve (using the Cubic Spline technique), and they will use this curve
to price selected instruments. We will then explain how Excel/VB can be used to perform historical
simulations and scenario analysis. We will also show how “Stress Testing” can be performed using
Extreme Value Theory analysis. After that, we will explain and work hands-on with the Monte Carlo
Simulation. Participants will learn to generate random numbers and samples from uniform and normal
distributions. We will define the stochastic differential equations (SDEs) for various processes for
equities prices, interest rates etc., and use these SDEs in conjunction with Monte Carlo simulation
routines to price and risk-assess various financial instruments, including path-dependent exotic
options. We will show how to use “Cholesky Decomposition” when sampling from multivariate
distributions, and we will discuss possible ways of achieving ”variance reduction”. The techniques are
then used to price a range of complex financial products, such as exotic options. Finally, participants
will learn how to implement “Principal Components Analysis” and how to combine PCA with Monte Carlo
simulation in order to create efficient pricing and risk management applications that can be used in
practice.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 12.00 Yield Curve Estimation and Cash Flow Analysis
- Yield Curves, Par Curves and Zero Coupon Curves
-
Estimation Techniques
- Bootstrapping
- Cubic Spline
- Other Estimation Techniques
-
Estimating and Valuing Complex Cash Flows
- Cash flows with pre-payment features
- Computer Workshop (Excel/VB)
Participants program yield curve
estimation routines in Excel/VB and use the estimated yield curves to value complex cash
flows
12.00 - 13.00 Lunch
13.00 - 16.30 Monte Carlo Simulation
- Introduction to Monte Carlo Simulation
-
Monte Carlo Toolkit
- Generating random numbers
- Sampling from normal/lognormal distributions
- Stochastic Differential Equations
- Cholesky Decomposition
-
Variance reduction techniques
- Stratified sampling
- Control Variate
- Antithetic sampling
- Computer Workshop (Excel/VB)
Participants program and test
sampling routines, SDE’ s and Cholesky factorisation routines
Day Two
09.00 - 12.00 Pricing Complex Instruments
- Pricing Complex Interest Rate Products
- Defining and Calibrating Interest Rate Models
- Pricing Interest Rate Options and Structured Interest Rate
Products
- Pricing Exotic Interest Rate Structures Using Monte Carlo
Simulation
- Calculating VaR for complex instruments
- Computer Workshop (Excel/VB)
Participants price selected (exotic)
structures using MC simulation
12.00 - 13.00 Lunch
13.00 - 16.30 Principal Components Analysis
- Common Factors Affecting Bond Returns
- Overview of Multi-Factor Interest Rate Risk Models
-
The Factor Model
- Eigenvalues, Eigenvectors and the Yield Curve
- Calculating and Interpreting Factor Loadings
- Using the Factor Model to Calculate VaR
- Factor Immunization for Hedging Yield Curve Fluctuations
- Monte Carlo Simulation Using PCA
- Computer Workshop
Participants use PCA to estimate risk factors
and construct optimal, factor-immunized portfolios
Evaluation and Termination of the Workshop