The Program consists of five courses, each with approximately 24-26 hours of instruction. Courses are offered approximately every four to six weeks.

Investment Science
The foundations of the theory and application of modern quantitative investment analysis are presented from an engineering perspective. The course explores how investment concepts are used to evaluate and manage opportunities, portfolios, and investment products including stocks, bonds, mortgages, and annuities. Topics will include: deterministic cash flows (term structure of interest rates, bond portfolio immunization, project optimization); mean-variance theory (Markowitz model, capital asset pricing); and arbitrage pricing theory.

Options Theory and Practice
The financial industry was revolutionized by the development of the Black-Scholes method for pricing options. This fundamental concept has been extended in several ways and now is used to analyze and construct new financial products for various purposes. This course covers the theory of derivatives in general, but with special emphasis on the underlying theory of options. In particular, we will show various ways that stock behavior is modeled, including lattices and differential equations. The theory of pricing will be presented for both types of models. In addition to the model of stock prices, we shall also consider the important models of interest rate fluctuations and the related theory of pricing interest rate derivatives. The class will include many examples of various derivatives and the calculation of appropriate prices. Students will learn that there are several computational methods for finding prices, including lattices, Black-Scholes partial differential equations, and Monte Carlo methods. A special feature will be the theory of real options, which are options on physical commodities, projects, and other assets that are not traded securities. Participants in the class will have the opportunity to actually calculate the prices of several complex financial derivatives and using a laptop computer and the theory presented in this module.

Credit Risk
Credit risk is the distribution of financial loss due to default of a counter party in a financial contract. This class describes a unified perspective of the quantitative analysis of credit risk. These tools will then be applied to the analysis, pricing and hedging of credit sensitive securities that are referenced on a single name, such as corporate bonds and credit default swaps (CDS). We discuss in detail the calibration of a pricing model to the market term structure of credit swap rates. We analyze the problem of forecasting a default event based on equity and equity option data, the testing of prediction systems, and the pricing of credit/equity hybrid derivatives such as equity default swaps. We then cover the mechanics and the pricing and hedging of credit derivatives such as cash collateralized debt obligations (CDO) and forwards and options on these instruments. We also consider the analysis of portfolio credit risk measurement. Most topics are accompanied by hands-on data-driven case studies, which exemplify model implementation. In this module, we also use the credit risk analysis to explain the underlying forces that cause the 2008 financial crisis.

Investment and Finance in China
This course offers a practical, “real world” understanding of foreign investment in China and how financing is used for trade and investment in China. It offers highlights of China’s development in finance since 1979, the beginning of the Open Policy. Through the “Current Events” portion of each class, the latest developments in investment and finance in China are discussed. The topics covered in the course will include:

1) China’s banking system (with an excellent Caselet involving the process of issuing an international bond by a Chinese Province);

2) Foreign direct investment and alternatives to direct investment using actual cases (with probably 5 Caselets from different industries illustrating how one overcomes obstacles to establishing and running a JV or other entity in China);

3) Trade and trade finance (including a Caselet on how to solve disputes in China);

4) Infrastructure finance (a survey of power, telecoms, ports, roads and other infrastructure with 4 short Caselets);

5) China’s stock markets and the process of listing a PRC company on the Stock Exchange of Hong Kong (with a Caselet involving bringing a Chinese company to the Hong Kong IPO market).

Two-Sided Market: A New Model for Business Innovation
Traditional business models are based on a value chain structure where value is created and combined at each stage of the chain, from upstream to downstream. This is a good paradigm for traditional manufacturing industries. However, for many service industries, especially various financial service industries and many new web-based industries, value does not only flow from supplier to customer, value also flows from customer to supplier. A firm can serve as a platform that facilitates the value flow from one side to the other and creates a positive network effect: more customers on one side give more value to the other side and verse versa. For example, in the credit card industry, VISA and MasterCard are platforms with this characteristic: more merchants accepting a particular credit card will give both the holder of that card more value; and conversely more people holding a particular credit card give merchants more value in accepting that card. A brokerage trading firm is also a platform that facilitates the two-way value flow between consumers and firms offering financial products. The new model perspective gives rise to strategic innovations that counter conventional wisdom based on the value chain model. In this course, we shall apply the results derived from a two-sided market perspective to develop service innovation strategies for a financial service enterprise. Extensive cases are used to illustrate the concept.

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