Course Overview
Course Introduction - Introduction to Financial Engineering
and Risk Management
Introduction to Financial Engineering and Risk Management course belongs to the Financial
Engineering and Risk Management Specialization. It provides a fundamental introduction to
fixed-income securities, derivatives, and the respective pricing models. The first module gives an
overview of the prerequisite concepts and rules in probability and optimization. This will prepare
learners with the mathematical fundamentals for the course. The second module includes
concepts around fixed-income securities and their derivative instruments. We will introduce
present value (PV) computation on fixed-income securities in an arbitrage-free setting, followed
by a brief discussion on the term structure of interest rates. In the third module, learners will
engage with swaps and options, and price them using the 1-period Binomial Model. The final
module focuses on option pricing in a multi-period setting, using the Binomial and the Black-
Scholes Models. Subsequently, the multi-period Binomial Model will be illustrated using
American Options, Futures, Forwards, and assets with dividends.
Financial Engineering and Risk Management Specialization
This specialization provides a broad introduction to financial engineering fundamentals. The
emphasis of Introduction to Financial Engineering and Risk Management and Term-
Structure and Credit Derivatives will be on the use of simple stochastic models to price
derivative securities in various asset classes including equities, fixed income, credit, and
mortgage-backed securities. We will also consider the role that some of these asset classes
played during the financial crisis. The follow-up courses, Optimization Methods in Asset
Management and Advanced Topics in Derivative Pricing, will continue to develop derivatives
pricing models. They will also focus on asset allocation and portfolio optimization, as well as
other applications of financial engineering such as real options, commodity and energy
derivatives, and algorithmic trading. Computational Methods in Pricing and Model
Calibration focuses on model calibration, option pricing, and interest rate instruments.
Below is the series of Financial Engineering and Risk Management Specialization:
Introduction to Financial Engineering and Risk Management
Term-Structure and Credit Derivatives
Optimization Methods in Asset Management
Advanced Topics in Derivative Pricing
Computational Methods in Pricing and Model Calibration
The overarching topics of the specialization include:
Derivative pricing (stochastic models, binomial tree, term structure)
Asset allocation (CAPM, mean-variance analysis)
Other topics (algorithmic trading; commodity and energy market; credit derivatives)
Interview with Prof. Emanuel Derman
The specialization will also draw from numerous case studies and industry practices, so that
you'll also learn how to apply FE models to solve problems and apply them in the real world.
Suggested Readings
The course is intended to be self-contained, but the following text will provide more detailed
coverage of some of the course material.
-Investment Science, by David G. Luenberger; Oxford University Press, 2013.
Recommended Background:
Students should at some point have taken intermediate to advanced undergraduate courses in:
(i) probability and statistics, (ii) linear algebra, (iii) calculus and (iv) optimization. There is a
prerequisite materials module available in Introduction of Financial Engineering and Risk
Management to help you review the basic knowledge you need for the course. With regards to
programming, we have designed the course so that all required "programming" questions can all
be completed within Excel and Python. That said, students are welcome to complete the
assignments using their software / programming languages of choice. It would also be very
helpful if students have had some prior exposure to an introductory finance course. In particular,
students should know what interest rates are, understand discounting and compounding, and have
some basic familiarity with options, futures etc. We suggest starting from course 1 to obtain the
best learning experience. Those financial engineering topics you learned in this specialization
will prepare you well for resolving related problems, both in the academic and industrial world.
Tip: The Prerequisite quizzes cover the concepts and knowledge you should understand in order
to succeed in this course. You can refer to the Prerequisite Material section in course 1: Intro to
Financial Engineering and Risk Management to go through background concepts that you need
help with as you progress along the course.
