INTRODUCTION TO FINANCIAL ENGINEERING

ISyE 6227 (Summer Session)

Professor: Shijie Deng

Office: GT Atlanta
Phone: 404-894-2300
Email: sd111@gatech.edu
Class time: Asynchronously recorded lectures posted weekly, May 12 – July 21.
Office Hours: Microsoft Teams session through appointment.
Teaching Assistant: TBA

1. Course Materials

The required text is Investment Science by Luenberger, Oxford University Press, 1998 or 2013.
Supplemental notes, handouts and exercises will be posted regularly and represent an integral part of
the course.

2. Prerequisites

Graduate level ISYE 6650 and ISYE 6669 (or, equivalent undergraduate probability and optimization
courses) with minimum grade of C, or prior consent by instructor - basically, students are expected to have
basic knowledge on: a) probability distributions and computing probabilities/expected
values/variances/covariances of random variables, b) quadratic optimization with constraints). Students
shall be able to use at least one programming tool (such as Python, R, Matlab, Excel VBA) to solve
problems in homework/project when necessary.

3. Course Description and Objectives

Upon completion of the course, students should be able to apply the core concepts and advanced
techniques in financial engineering. Students should also be able to construct the economic decision
models for analyzing capital investments, pricing financial derivative securities, and managing and valuing
project risks.
Topics cover: institutional features of financial markets: bond, equity, derivatives and commodities.
Probabilistic tools for modeling and analyzing financial markets: notions of complete markets, risk hedging
and no-arbitrage pricing. The term-structure of interest rates, yields and bond pricing. Discrete-time asset
pricing models: the capital-asset-pricing model and mean-variance portfolio management. Security price
models and financial data, Brownian motions and geometric Brownian motions. Derivatives pricing: the
binomial option pricing model; dynamic hedging and no-arbitrage pricing. Continuous-time asset pricing
models; Black-Merton-Scholes option pricing model. Time permitting, representative applications of
machine learning models in credit risk assessment and quantitative trading will be discussed.

4. Course Organization

• Content delivery plan is as follows.

o Lectures are given asynchronously as recorded videos (synchronous session link will also
be provided whenever feasible).
o 3-4 synchronous check-in sessions will be held to discuss homework problems or course
project in the form of Microsoft Teams meetings from 10am to 11am on Wednesdays (to
be determined) with one-week advance notice.
• Lecture time will be used to motivate, explain, illustrate and expand concepts and techniques. If
you must miss class it is your responsibility to catch up. It is your responsibility for obtaining
class materials before each class. On occasion you will be requested to read a handout or certain
parts of the book and be prepared to discuss during check-in sessions.
• Course content is organized into 7 modules:
o Module 1: Introduction and Cashflow Analysis
 ▪ Learning objective: to learn how to model cash flows and different criterions for
evaluating cash flows.
▪ Week 1: Deterministic cash flow analysis, present value and internal rate of
return
o Module 2: Fixed Income Securities
▪ Learning objective: to learn how to evaluate common cash flow patterns. Learn
the concept of yields and different types of interest rates, duration, convexity
and immunization.
▪ Week 2: Valuation of common cash flow instruments
▪ Week 3: Yield, immunization, and different types of interest rates
o Module 3: Term Structure of Interest Rates
▪ Learning objective: to learn characteristics of interest rate curves. How to value
cash flows based on term structure of interest rates. Immunization with respect
to interest rate curve movements.
▪ Week 4: Term structure of interest rates and bond pricing
o Module 4: Mean-variance Portfolio Theory
▪ Learning objective: to learn how to model random cash flows. Measures for
risks and rewards. How to achieve proper tradeoffs between rewards and risks
through mean-variance optimal portfolios.
▪ Week 5: Random cash flow models, reward/risk measures, and diversification
▪ Week 6: Mean-variance portfolio theory
o Module 5: Capital Asset Pricing Theory
▪ Learning objective: to learn Capital Asset Pricing Model and its applications.
▪ Week 7: Equilibrium, market portfolio, capital asset pricing model, and factor
based trading models
o Module 6: Derivative Securities
▪ Learning objective: to learn basic concepts of derivative securities and pricing
by no-arbitrage. How to hedging cash flows so that the risk is minimized.
▪ Week 8: Forwards, futures, and minimum variance hedge
o Module 7: Options Pricing Theory
▪ Learning objective: to learn classical options pricing models and dynamic
hedging.
▪ Week 9: Options basics, binomial tree model, dynamic hedging
▪ Week 10: Black-Merton-Scholes Option Pricing Model

5. Grading

Your grade will be determined as follows: homework sets (10%), 4 timed-quizzes (offered through
Canvas, open-book, open-notes) (20%), midterm project on mean-variance portfolio optimization (can be
completed with any programming tools, e.g. Python, Matlab, C++ or Excel): due on June 25 (30%), and
Final Exam (Canvas timed-exam and proctored by honorlock, open-book, open-notes, currently scheduled
on July 29) (40%). No “re-grading”.

6. Late Submission Policy

1) 5% grade deduction if submission received within 24 hours passing the due time. 2) 15% grade
deduction if submission received within 48 hours passing the due time. 3) 50% grade deduction if
submission received later than 48 hours after the due time.
2) Due time for Distance Learning students in the Q-section is the posted due date plus 3 days.

7. Communications

E-mails concerning the class (e.g., announcements, notes) will be sent to your GT-Account e-mail
address via Canvas, so please check this account often. Piazza on Canvas will be used for class discussion.
You are encouraged to post your questions on Piazza.
8. Course Technology

Students shall be able to utilize any programming tools, e.g. Python, R, Matlab, C++ or Excel to work
with financial data and solve an optimization problem taught in the course. Python 3.7 and relevant major
packages can be installed through Anaconda distribution which is available at:
https://www.anaconda.com/distribution/. Students are expected to have access to Zoom for participating in
the synchronous check-in sessions.
If a quiz/exam is assigned through Canvas, it is proctored with honorlock, students must have a
broadband internet connection, a webcam, a microphone, a secure private location to take an exam, their
Photo ID, and Chrome as web browser. Please refer to Honorlock Student Guide for important technical
considerations. For minimum system requirements, please visit the Honorlock’s support page and scroll
down to the section "Minimum Requirements" to run system and Internet speed checks.

9. Student Conduct and (N)etiquette

Communicating appropriately in the online classroom can be challenging. In order to minimize this
challenge, it is important to remember several points of “internet etiquette” that will smooth
communication for both students and instructors:

• Read first, Write later. Read the ENTIRE set of posts/comments on a discussion board before
posting your reply, in order to prevent repeating commentary or asking questions that have already
been answered.
• Avoid language that may come across as strong or offensive. Language can be easily
misinterpreted in written electronic communication. Review email and discussion board posts
BEFORE submitting. Humor and sarcasm may be easily misinterpreted by your reader(s). Try to
be as matter-of-fact and professional as possible.
• Follow the language rules of the Internet. Do not write using all capital letters, because it will
appear as shouting. Also, the use of emoticons can be helpful when used to convey nonverbal
feelings.
• Consider the privacy of others. Ask permission prior to giving out a classmate's email address or
other information.
• Keep attachments small. If it is necessary to send pictures, change the size to an acceptable 250KB
or less (one free, web-based tool to try is picresize.com).
• No inappropriate material. Do not forward virus warnings, chain letters, jokes, etc. to classmates or
instructors. The sharing of pornographic material is forbidden.
NOTE: The instructor reserves the right to remove posts that are not collegial in nature and/or do not
meet the Online Student Conduct and Etiquette guidelines listed above.