Financial Trading and Applications

Catalog description

The focus of this course is the application of financial theory and technology to the practice of financial trading. The first half of the class examines tools for constructing and evaluating trading strategies. After a short review of probability and statistics, attention turns to the analysis of models for valuing options, credit default swaps, and other financial instruments. Emphasis is placed on the assumptions underlying these models and the application of these models in the real-world. This discussion includes approaches for estimating volatility and the use of the models when underlying assumptions do not hold. The first half of the course concludes with a discussion of value-at-risk and tools for evaluating performance. The analysis of these topics highlights commonly used measures of performance and the potential pitfalls using these measures. The second half of the class examines trading strategies commonly used be hedge funds. Strategies discussed include merger arbitrage, relative value, momentum, index arbitrage, and other quantitative based strategies. Students also study accounting based and fundamentally based trading strategies. Application of these strategies in both the equity and fixed income markets is examined. Attention is also paid to the impact of trading on market prices and other aspects of market microstructure. Throughout the second half of the course, students participate in a project in which they form into teams of fund managers who analyze market data with the purpose of constructing and managing a portfolio that applies various trading strategies. The fund is managed using market simulation software that allows students to execute all trades using real-time market prices and allows them to go long or short equity, commodity, fixed income, and foreign exchange instruments, as well as derivative securities. Upon completion of the project, students make a pitch to a group of potential investors (the class) in which they summarize the themes underlying their strategies, provide performance metrics for their fund, and discuss their primary trading strategies if they were to continue as fund managers.The course pedagogy is lectures, case assignments, trading and valuation simulations, and a trading project. The class will make extensive use of Bloomberg, Reuters, trading software, basic programming languages for financial software, and other technology available.