This is the first in a series of two courses on financial engineering that take participants from arbitrage pricing theory to stochastic volatility models.

Financial Engineering 1 is a two-day course. It opens with a discussion of the Samuelson (1965) option pricing model. This model was theoretically correct but useless because it required inputs that were not observable in the marketplace. Studying the Samuelson model teaches important lessons that lay the groundwork for understanding the brilliance of the subsequent Black-Scholes (1973) model. We employ basic stochastic calculus to derive the Black-Scholes partial differential equation. We then use this flexible tool to value a variety of instruments linked to equities and foreign exchange. Turning the Black-Scholes approach on its head, we next introduce risk neutral valuation and see how it is driving current practice in financial engineering. The course closes with a discussion of fixed income term structure models.

Prerequisites for the course are the financial mathematics series of courses or in-depth knowledge of the math covered in those courses. No prior knowledge of partial differential equations or finite difference methods is required. This material is introduced in the course.

Financial Engineering 1 is the essential course for professionals who are generally familiar with financial engineering but want to take the next step and become proficient financial engineers themselves.