About this course: 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.

Who is this class for: This course is primarily aimed at advanced graduates interested in quantitative finance, along with finance professionals with an interest in interest rate models. Prerequisites for this course: elementary probability theory and real calculus. To solve the quizzes, students also need a matrix-oriented scientific computing package such as Matlab or R.

Created by: École Polytechnique Fédérale de Lausanne

Taught by: Damir Filipović, EPFL
The Swissquote Chair in Quantitative Finance and Swiss Finance Institute Professor

Level	Advanced
Commitment	5 weeks of study, 6 hours per week
Language	English
How To Pass	Pass all graded assignments to complete the course.
User Ratings	4.5 stars Average User Rating 4.5See what learners said

Syllabus

WEEK 1

Introduction

1 video, 4 readings

Video: Introduction
Reading: Evaluation
Reading: Certificate
Reading: Course discussions
Reading: Where to get help

WEEK 2

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.

5 videos, 2 readings, 5 practice quizzes

Video: Interest Rates and Discount Bonds
Reading: Compounded Interest Rates
Practice Quiz: Interest Rates and Discount Bonds
Video: Forward and Futures Rates
Reading: Continuously Compounded Forward Rate (Forward Yield)
Practice Quiz: Forward and Futures Rates
Video: Coupon Bonds and Interest Rate Swaps
Practice Quiz: Coupon Bonds and Interest Rate Swaps
Video: Duration and Convexity
Practice Quiz: Duration and Convexity
Video: Market Conventions
Practice Quiz: Market Conventions

Graded: Interest Rates and Related Contracts

WEEK 3

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.

4 videos, 4 practice quizzes

Video: Bootstrapping Example
Practice Quiz: Bootstrapping Example
Video: Exact Methods
Practice Quiz: Exact Methods
Video: Smoothing Methods
Practice Quiz: Smoothing Methods
Video: Principal Component Analysis
Practice Quiz: Principal Component Analysis

Graded: Estimating the Term Structure

WEEK 4

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.

4 videos, 1 reading, 4 practice quizzes

Video: Stochastic Calculus
Reading: Definition of Brownian Motion without Filtration
Practice Quiz: Stochastic Calculus
Video: Short Rate Models
Practice Quiz: Short Rate Models
Video: Heath-Jarrow-Morton Framework
Practice Quiz: Heath-Jarrow-Morton Framework
Video: Forward Measures
Practice Quiz: Forward Measures

Graded: Stochastic Models

WEEK 5

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.

4 videos, 4 practice quizzes

Video: Interest Rate Futures and Convexity Adjustment
Practice Quiz: Interest Rate Futures and Convexity Adjustment
Video: Caps and Floors
Practice Quiz: Caps and Floors
Video: Swaptions
Practice Quiz: Swaptions
Video: Calibration Example
Practice Quiz: Calibration Example

Graded: Interest Rate Derivatives

WEEK 6

Final Quiz

Graded: Final quiz

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How It Works

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Creators

École Polytechnique Fédérale de Lausanne

Ratings and Reviews

Rated 4.5 out of 5 of 35 ratings

Very helpful course to revisit my daily work covering curves, derivative pricing.

This course has been quite challenging, which I really have enjoyed. I guess this course is a shorter and easier version of the real course the professor teaches at his own institution. It only covers about one third of his text book, but now I know I can finish the textbook by myself. I strongly recommend to future learners that they get his textbook. I learned more from examples given the textbook. Since there didn't seem many learners on this course, it was quite frustrating to find a little mistake that I was making, but I guess that understanding whether the mistakes are conceptual or computational is also an important part of financial engineering. Anyway, I hope he will offer more of courses like this on coursera.

A really useful and practical course in Quantitative Finance, which really raises the bar in terms of difficulty but also the knowlegde gained is definitely there. I would recommend this course even to seasoned industry professionals (e.g. traders, quants, portfolio managers) since it provides relevant techniques for measuring and managing interest rate risk and understanding interest rates derivatives space/markets. On the other hand I do feel that with useful comments, provided by the Coursera community, this course can only become better, as time goes by.

wonderful

Interest Rate Models

Interest Rate Models

Interest Rate Models