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Financial Engineering Understanding Volatilities & Commodities

  • Enseignant(s):
  • Titre en français: Ingéniérie financière, et matières premières
  • Cours donné en: anglais
  • Crédits ECTS:
  • Horaire: Semestre d'automne 2018-2019, 4.0h. de cours (moyenne hebdomadaire)
  •  séances
  • Formations concernées:
    Maîtrise universitaire ès Sciences en finance, Orientation gestion des actifs et des risques

    Maîtrise universitaire ès Sciences en finance : Entrepreneuriat financier et science des données

    Maîtrise universitaire ès Sciences en finance, Orientation finance d'entreprise



This course has four objectives:

1) To give a very good understanding of various concepts associated with market volatility, option pricing and market skew. Several models for pricing derivative are rigorously discussed. An important objective is to get a simple and intuitive understanding of currently used tools extending the classical Bachelier and Black-Sholes models.

2) To overview selected topics related with investing in Structured Products and pricing them. The operational and legal structure related to Structured Products is overviewed and pricing of two basic SP’s is discussed in details. Again the objective is to get a simple an intuitive understanding which can be extended to a wider class of Structured Products.

3) An overview of the practical and theoretical aspects of Commodity Markets including Energy, Agricultural and Metal Commodities and Commodity Derivatives. The objective is to get a basic understanding of investment strategies related to Commodities.

4) To discuss selected topics related to Risk Management and pricing Asian Options, Barrier Options together with American and Bermudan contracts.

The first part of the lecture will be devoted to revisiting elementary option theory and outline extensions that accounts for skew and smile of prices observed on the market. This will allow getting a thorough understanding of current market volatility parameters and their applications including several basic option strategies.

The second part will give to participants a base to analyse and/or advise private and institutional clients on the inclusion of options and structured products in their portfolios. First the basic elements of the operational and legal structure of Structured Products will be outlined. Next the pricing of two very popular products will be presented and implemented in practical exercises.

The third part of the lecture will deal with understanding the Commodity Market, the investment strategies, the types of contracts involved and some pricing methods. An important part of the lecture will be related to the Electricity market, which is showing interesting extreme behaviour due to almost zero storage capacity. We will also overview the textbook of Helyette Geman “Commodities and Commodity Derivatives - Modelling and Pricing for Agriculturals, Metals and Energy”.

The fourth part of the lecture will discuss pricing of Barrier and Asian Options together together with analyzing selected Risk Management topics. These two types of options will be used as specific cases for Risk Management analysis. We shall also discuss selected topics on Value at Risk and other Risk Management tools.

The course will include practical exercises on historical financial data and on revisiting several math topics that are very useful for understanding pricing of financial instruments.


The material of the Lecture will be presented in four parts. Approximately 40-50% of the lecturing time will be devoted to Commodities and

Structured Products.

= Part One: Understanding volatilities, skew and smile

The various aspects and meanings of market volatility.
Selected traded instruments and derivatives; how elementary contracts are structured
Revisiting the Black Sholes Model and the Bachelier/Normal Model. The Implied Volatility concept
Going in between the Normal and Log-Normal pricing: the Shifted-LogNormal model, the MF (Model-Free) Interpolation and the MF Hedging
Quantitative Skew and Smile modelling - the Dupire, SABR and Heston option pricing models.
Skew and smile for S&P and DAX index options; the geometric meaning of Skew in Option pricing
Selected option based hedging strategies Basic put protection, Strangle/Straddle strategies and Collar strategies

= Part Two: Structured Products:

Investing in Structured Products; Equity-Linked, Index-linked and Commodity-linked Structured Products
Basic Product strategies: yield enhancement, capital protection and auto-callable products.
Operational and legal structure involved in Structured Products
Pricing mono-participation and mono-barrier Structured Products.

= Part Three: Commodities and Commodity Derivatives

Fundamentals and History of Commodity Spot and Futures Markets.
Relationship between Spot Prices and Forward Prices: historic evolution.
Investing in Electricity; the utmost aggressive market?
Investing in un-strechted Commodities; basic and "enhanced" rolling strategies.
Oil commodities: comparing the historic and recent oil markets, skew and smile for oil derivatives.
Selected topics on Agricultural Commodities, Energy Markets, Metals, and others.

= Part Four: Selected topics on Pricing and Risk Management.

Pricing Asian Options
Pricing Barrier Options
Pricing American and Bermudan contracts
Selected topics on Value at Risk and other Risk Management tools
Selected topics on Commodity Investment strategies


There is no required textbook for the course, yet it is recommended to spend some time with "Theorie de la Speculation" of Louis Bachelier. Detailed notes will be provided in class. Books are useful to get catch the environment.

The following books and artictles are setting intreresting perspectives:

- Bachelier L. (1900). Theorie de la Speculation. Paris.(

- Le Discours de la méthode
Pour bien conduire sa raison, et chercher la vérité dans les sciences
René Descartes, Leyde le 8 juin 1637

- Hagen Kleinert; Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets; World Scientific, Singapore

(2009 )

The following books are classics:
- John Hull, Options, Futures, and Other Derivative Securities, Prentice-Hall (2002) (All FinEng)
- Joshi M., The concept and Practice of Mathematical Finance, Cambridge University Press (2003) (All FinEng)
- Geman H., Commodities and Commodity Derivatives, John Wiley&Sons (2005) (Commodities)
- Kat H., Structured Equity Derivatives, John Wiley and Sons (2001) (S Products)
- Blumke A., How to Invest in Structure Products, John Wiley and Sons (2009) (S Products)
- Rubinstein M. (1983). Displaced Diffusion Option Pricing. Journal of Finance, Volume 38, Issue I, 213-217
- Dupire, B. (1994). Pricing with a Smile. RISK Magazine, no. 7, pp. 18-20
- Lesniewski A., The Volatility Cube, Interest Rate & Credit Models, Springer Verlag 2004
- Rebonato R. (2004). Volatility and correlation: the perfect hedger and the fox. John
Wiley & Sons Ltd, West Sussex PO19 8SQ, England

A good and strong overview of selected topics is given in the excellent Master thesis. These these often challenge the limits of the status quo and are fascinating to read.
To start with a work of Option pricing on two strongly skewed markets (S&P 500 and DAX)
Master Thesis of Doinita Negru Skew and Smile Modelling versus Option Market data, Master Thesis, HEC - School of Business, Lausanne 2013

This and other thesis will be listed and available under request

Additional literature on option pricing and Structured Products will be provided in due course.


First year MScF courses.


1ère tentative

Ecrit 3h00 heures
Autorisée avec restrictions
Autorisée avec restrictions

==== Pre-requis

First year MScF courses.

=== Evaluation

Mid-term Exam: not compulsory written, 2.5 hours, Closed book, Only calculator TI-30X II (B or S) and HP 10s are allowed

Normal Exam : written, 3hours, Closed book, Only calculator TI-30X II (B or S) and HP 10s are allowed

Final grade: If the Final Exam grade is at least 5.0 the Final Grade is Max(0.51 Midterm + 0.49 Final, Final). If the Final Exam grade is 4.5 the Final Grade is Min(Max(0.51 Midterm + 0.49 Final, Final),5.0)
Otherwise the Final Grade is the one obtained at the Final Exam.

Documentation furnished by the professor


Ecrit 3h00 heures
Autorisée avec restrictions
Autorisée avec restrictions

Rattrapage : written, 3 hours, Closed book, Only calculator TI-30X II (B or S) and HP 10s are allowed

Final grade: Grade obtained at the Final Exam

Documentation furnished by the professor

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