INDR 473
Koç University
Department of Industrial Engineering
Financial Engineering
Syllabus
Fall 2005
S. Özekici
Course Description
Recent developments during the last decade has shown the need for graduates who are equipped
with the necessary tools and techniques to evaluate financial markets, determine investment
strategies, as well as design, engineer and market new financial products. The topic has become
more appealing with the emergence of new securities and financial instruments, like options,
swaps, interest rate derivatives, retirement funds, etc. This course is designed to provide an
introduction to this new and exciting area of financial engineering. The main objective is to
provide introductory level education to students who want to work in the new and growing
finance industry. This includes investment banks and corporations, financial management and
consulting companies, insurance companies and firms that invest in financial markets. The course
focuses on a wide range of topics in financial engineering including fixed income securities,
interest rate analysis, portfolio management, capital asset pricing model, arbitrage pricing theory
and derivative securities like forwards, futures, swaps and options.
Course Schedule
No
Date
Topic
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Sep. 27
Sep. 29
Oct. 4
Oct. 6
Oct. 11
Oct. 13
Oct. 18
Oct. 20
Oct. 25
Oct. 27
Nov. 1
Nov. 3
Nov. 8
Nov. 10
Nov. 15
Nov. 17
Nov. 22
Nov. 24
Nov. 29
Dec. 1
Dec. 6
Dec. 8
Dec. 13
Dec. 15
Dec. 20
Dec. 22
Dec. 27
Dec. 29
Jan. 3
Course Introduction and Overview
Basic Theory of Interest
Fixed Income Securities
Fixed Income Securities
Fixed Income Securities
The Term Structure of Interest Rates
Applied Interest Rate Analysis
Mean-Variance Portfolio Theory
Mean-Variance Portfolio Theory
Mean-Variance Portfolio Theory
Mean-Variance Portfolio Theory
No Class
The Capital Asset Pricing Model
Midterm Examination
The Capital Asset Pricing Model
The Capital Asset Pricing Model
The Capital Asset Pricing Model
Models and Data
Models and Data
Forwards, Futures and Swaps
Forwards, Futures and Swaps
Forwards, Futures and Swaps
Forwards, Futures and Swaps
Models of Asset Dynamics
Models of Asset Dynamics
Models of Asset Dynamics
Basic Options Theory
Basic Options Theory
Basic Options Theory
Basic Options Theory
Jan. 5
Reading
HW
1,2
3
3
3
4
5
6
6
6
6
6
7
7
7
7
8
8
10
10
10
10
11
11
11
12
12
12
12
HW#1
HW#2
HW#3
HW#4
HW#5
HW#6
HW#7
HW#8
HW#9
HW#10
Required Textbook
1. D.G. Luenberger, Investment Science, Oxford University Press, 1998
Textbooks on Reserve
1. J.C. Hull, Options, Futures and Other Derivatives, Prentice Hall, 2000
2. P. Wilmott: Derivatives: The Theory and Practice of Financial Engineering, John Wiley,
2000.
These textbooks are not required and they are on reserve in the library. They are recommended
for additional reading.
Homework
The students are encouraged to work on all of the problems that are given at the end of each
chapter. They are required to hand in homeworks that are assigned and graded on a regular basis.
Some homework questions will be discussed in class or in problem sessions. Late submissions
will not be accepted. The following list gives the questions and the duedates for each set.
HW #
1
2
3
4
5
6
7
8
9
10
Questions
Duedate
Chapter 2: 4, 6, 8, 10, 12
Chapter 3: 2, 6, 10, 12, 14
Chapter 4: 2, 6, 11, 12, 14
Chapter 5: 2, 7, 8,10, 12
Chapter 6: 2, 4, 6, 8, 10
Chapter 7: 2, 4, 5, 6, 8
Chapter 8: 2, 4, 5, 6, 8,
Chapter 10: 4, 8, 10, 12, 14
Chapter 11: 2, 4, 6, 7, 8
Chapter 12: 4, 6, 10, 13, 15
Oct. 14
Oct. 14
Nov. 8
Nov. 8
Nov. 8
Dec. 7
Dec. 7
Dec. 20
Jan. 6
Jan. 6
Problem Sessions
Extra problem sessions are scheduled to discuss some of the homework and review exercises. The
dates are:
1. PS#1: Oct. 14
4. PS#4: Dec. 20
2. PS#2: Nov. 8
5. PS#5: Jan. 6
3. PS#3: Dec. 7
Grading
1. Homework: 10%
2. Midterm Examination: 40% (Nov. 10)
3. Final Examination: 50%
The examinations will be closed-book and closed-noted, but the students will be allowed to bring
an A4 size formula sheet with them. Programmable calculators are not permitted or they will be
reset at the beginning of the exam.
Attendance
All students are required to attend classes and discussion sessions such as tutorials, labs and
problem sessions.
Academic Honesty
Honesty and trust are important to all of us as individuals. Students and faculty adhere to the
following principles of academic honesty at Koç University:
1. Individual accountability for all individual work, written or oral. Copying from others or
providing answers or information, written or oral, to others is cheating.
2. Providing proper acknowledgement of original author. Copying from another student’s paper
or from another text without written acknowledgement is plagiarism.
3. Authorized teamwork. Unauthorized help from another person or having someone else write
one’s paper or assignment is collusion.
Cheating, plagiarism, and collusion are serious offences resulting in an F grade and disciplinary
action.
Instructor
Assistant
Süleyman Özekici
Email: sozekici@ku.edu.tr
Room: ENG 119
Phone: 1723
Office Hours: TU TH B5 B5
Ethem Çanakoğlu
Email: ecanakoglu@ku.edu.tr
Room: ENG 203
Phone: 1737
Office Hours: MN WE B4 B4