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  • Provider Coursera
  • Subject Finance
  • $ Cost Free Online Course (Audit)
  • Session Upcoming
  • Language English
  • Certificate Paid Certificate Available
  • Start Date
  • Duration 6 weeks long

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Overview

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This course gives you an easy introduction to interest rates and related contracts. These include the LIBOR, bonds, forward rate agreements, swaps, interest rate futures, caps, floors, and swaptions. We will learn how to apply the basic tools duration and convexity for managing the interest rate risk of a bond portfolio. We will gain practice in estimating the term structure from market data. We will learn the basic facts from stochastic calculus that will enable you to engineer a large variety of stochastic interest rate models. In this context, we will also review the arbitrage pricing theorem that provides the foundation for pricing financial derivatives. We will also cover the industry standard Black and Bachelier formulas for pricing caps, floors, and swaptions.

At the end of this course you will know how to calibrate an interest rate model to market data and how to price interest rate derivatives.

Syllabus

Introduction


Interest Rates and Related Contracts
We learn various notions of interest rates and some related contracts. Interest is the rent paid on a loan. A bond is the securitized form of a loan. There exist coupon paying bonds and zero-coupon bonds. The latter are also called discount bonds. Interest rates and bond prices depend on their maturity. The term structure is the function that maps the maturity to the corresponding interest rate or bond price. An important reference rate for many interest rate contracts is the LIBOR (London Interbank Offered Rate). Loans can be borrowed over future time intervals at rates that are agreed upon today. These rates are called forward or futures rates, depending on the type of the agreement. In an interest rate swap, counterparties exchange a stream of fixed-rate payments for a stream of floating-rate payments typically indexed to LIBOR. Duration and convexity are the basic tools for managing the interest rate risk inherent in a bond portfolio. We also review some of the most common market conventions that come along with interest rate market data.

Estimating the Term Structure
We learn how to estimate the term structure from market data. There are two types of methods. Exact methods produce term structures that exactly match the market data. This comes at the cost of somewhat irregular shapes. Smooth methods penalize irregular shapes and trade off exactness of fit versus regularity of the term structure. We will also see what principal component analysis tells us about the basic shapes of the term structure.

Stochastic Models
Models for the evolution of the term structure of interest rates build on stochastic calculus. We start with a crash course in stochastic calculus, which introduces Brownian motion, stochastic integration, and stochastic processes without going into mathematical details. This provides the necessary tools to engineer a large variety of stochastic interest rate models. We then study some of the most prevalent so-called short rate models and Heath-Jarrow-Morton models. We also review the arbitrage pricing theorem from finance that provides the foundation for pricing financial derivatives. As an application we price options on bonds.

Interest Rate Derivatives
We apply what we learnt to price interest rate derivatives. Specifically, we focus on the standard derivatives: interest rate futures, caps and floors, and swaptions. We derive the industry standard Black and Bachelier formulas for cap, floor, and swaption prices. In a case study we learn how to calibrate a stochastic interest rate model to market data.

Final Quiz


Taught by

Damir Filipović

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Reviews for Coursera's Interest Rate Models
3.3 Based on 4 reviews

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  • 1
Brian C
2.0 2 months ago
by Brian is taking this course right now.
the description of this class is that its an easy introduction to interest rate models. this is complete nonsense they should state it might be easy if you have a ph.d in stochastic calculus. the lecture slides are ambiguous and totally confusing. there are no worked examples explaining the concepts clearly. the assignments particularly the ones requireing calibratiion of various term structure models are utterly ridiculous the main problem being dealing with large matrices and getting the daycounts right. While this may be what a team might be faced with in a large Ibank for the purpose…
Was this review helpful to you? Yes
Richard E
1.0 8 months ago
by Richard dropped this course, spending 20 hours a week on it and found the course difficulty to be very hard.
Well, where to start with??

The class contents and lecture slides will not help you to answer the practice quizzes. The practice quizzes do not have a guide telling you what should you do?

From the above, the actual graded quiz is a non sense . None of the material covered by you , it is useful to work the questions.....No numerical examples to apply to the real quiz

one of the videos or lecture slides has the word "SAWTOOTHS" an unforgiveable grammar error coming from 2 goofballs with PhD degrees....They are not familiar with sawteeth

they…
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Dietcoke D
5.0 2 weeks ago
Dietcoke is taking this course right now, spending 10 hours a week on it and found the course difficulty to be hard.
This is an advanced course for people in quantitative finance field ONLY. Those who lack related background may find it very difficult but it is a good course for people in quant field.
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Anonymous
5.0 4 months ago
Anonymous completed this course.
Difficult but very interesting course. Give a clear introduction to quantitative finance but on the other hand, it does not give enough references, link to article to go deeper into subject

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