# Fixed Income and Credit (2019-2020)

This course examines fixed income markets in which participants are

essentially concerned with the time value of money. We look at market

conventions and describe the principal types of traded products. We

describe different approaches to modelling interest rates and the

resulting pricing and hedging of interest rate derivatives. There will

be some discussion of the changes since the financial crisis for fixed

income markets. We also consider some simple models for

credit risk and how credit is handled after the crisis.

Introduction to fixed income markets: interest rates, yield curves,

basic products (FRAs, bonds, swaps, caps, swaptions); modelling interest

rates; short rate models modelling under physical and risk-neutral

measures; diffusion models and term structure equation; affine models;

examples; two-factor models; forward rates models: Heath-Jarrow-Morton

(HJM) framework, bond prices and absence of arbitrage; market models:

change of numeraire, forward measures, LIBOR market models. Post crisis

changes, multi-curve models.

Introduction to credit markets: basic products such as CDS, reduced form

and structural models for default. An introduction to valuation adjustments.

1) T Bjork: Arbitrage Theory in Continuous Time, Third Edition, OUP 2009

2) D Filipovic, Term-Structure Models, Springer 2009

3) M Musiela and M Rutkowski: Martingale Methods in Financial Modelling,

Second Edition, Springer 2005

4) S E Shreve: Stochastic Calculus for Finance II: Continuous-Time

Models, Springer 2004

5) P Schonbucher: Credit derivative pricing models, Wiley 2003

*Please note that e-book versions of many books in the reading lists can be found on SOLO and ORLO.*