FE635 Financial Enterprise Risk Engineering

Course Catalog Description


This course is a continuation of FE 535. It is divided in 2 parts: Lectures and Practice. On the Lectures section the course begins with Risk management case studies. It continues with basic and advance theory of volatility trading (with emphasis in FX market) before focusing into strategies for quantitative investing. Credit Derivatives will be introduced along with the pricing models using Hazard rates and Copula Models. Modern regulatory theory using Basel II, Basel III, and CVA as a starting point will be analyzed. We would usually have 2 or 3 classes given by invited speakers who are practitioners with long trajectories as traders, structurers or quants. On the Practice section we spend the whole semester on a trading contest. The contest consists on: 1- building a system to book, model and risk derivatives (delta 1, vanilla options and second level options); 2- creating a trading book composed of dozens of trades. 3- Hedging the book and trying to maximize the profit while following a real live market. The idea is to get as close as possible to a real-life trading experience. At the end of the semester the student with the largest profit (and with an acceptable system) wins the yearlong trading contest. Homework (about 7 homework per semester) is the only source of grading. Homework is directly related to the lectures and to the Practice.

Campus Fall Spring Summer
On Campus X
Web Campus X


Professor Email Office
Juan M. Eroles jeroles@stevens.edu
Yee Han Look ylook@stevens.edu

More Information

Learning Outcomes

  • Risk Management Case Studies
  • Strategies for Quantitative Investing
  • Hedging, Pricing and Executing strategies
  • Blacks-Scholes, its assumptions, limitations and extensions
  • Credit Derivatives
  • Basel II, Basel III, and CVA

Course Resources


Practical Methods of Financial Engineering and Risk Management, Rupak Chatterjee, Apress-Springer, 2014.

Additional References

Risk Management and Financial Institutions, John Hull, John Wiley & Sons, 2012.

Monte Carlo Methods in Financial Engineering, Paul Glasserman, Springer-Verlag, 2004.

Fixed Income Securities, 3rd Edition, Bruce Tuckman & Angel Serrat, Wiley Finance, 2012.


Grading Policies

Grades will be based on: Homework (90 %) Class Participation (10 %)

Lecture Outline

Topic Professor
Week 1 Introduction: Market Instruments. Chapter 1 Juan Eroles
Week 2 YC construction. Arbitrage schemes; Instruments used; Trading the curve Chapter 2 and class notes. Yee Han Look
Week 3 Stochastic Processes - Intro to FX: FX parity; Spot and Forward trading; FX conventions Juan Eroles
Week 4 Introduction to Black-Scholes. BS usage for a practitioner. First and Second order risks. Xgamma. Intuitive awareness Juan Eroles
Week 5 Black-Scholes shortcomings. 1- Discrete Hedging; 2- Volatility uncertainty; 3- Smile effects Juan Eroles
Week 6 Risk Manangement: GARCH - Statistics Juan Eroles
Week 7 Introduction to Credit. Credit Default Swaps; relationship to Bonds; Credit as a traded asset Class Yee Han Look
Week 8 Securitization: value of securitization and modeling of the contracts Yee Han Look
Week 9 Introduction to X-VAs: CVA/FVA Yee Han Look
Week 10 Invited Speaker 1: FX option trader Juan Eroles – Invited Speaker
Week 11 Risk Weighted Assets: Counterparty RWAs. Calculation and modeling Yee Han Look
Week 12 Invited Speaker 2: PCA and Yield Curve trading Juan Eroles – Invited Speaker
Week 13 Last Class: Hornet contest finale Juan Eroles