Deep Quant Finance

1) Primer
1.1. Math Primer
The module contains essential math toolbox for Quant Finance. These topics are
foundational for any Quant finance use case e.g. pricing, risk modeling, trading, portfolio
optimization etc. The following topics will be covered. All concepts are covered with
derivation of key formulas and dynamic visualizations in Excel.

Set Theory Basics

Relations & Functions
Complex Numbers
Limits and Derivatives
Taylor Series
Integration
Differential Equations
Vectors
Matrices
Partial Derivatives
Convex Optimization
Numerical Integration
Elementary Probability Theory
Measure Theory (Filtration, 𝜎 − 𝑎𝑙𝑔𝑒𝑏𝑟𝑎)
Named Distributions (Discrete)
Named Distributions (Continuous)
Joint distributions
Marginal and Conditional densities
Conditional Expectation
Linear Regression
Time Series Analysis
Fourier Analysis

Assignment Exercise Set

Question Set on Probability and Expectation for Interviews

1.2. Python Primer

Learn Python basics to perform routine tasks such as arithmetic operations, manipulating data,
visualizing data and writing functions and custom classes for various Quant Finance use cases
such as pricing and risk modeling. The topics are as follows

Data Structures in Python

If statements & loops
Functions and Lambdas
 Object oriented programming

You will also learn some of the popular python modules such as

NumPy – Vectorized calculations

Pandas – 2D data reading, writing, cleaning
Matplotlib – Basic visualization
Seaborn and Plotly – for advanced visualization
SciPy –probability, statistics and optimization
Statsmodels – Regression and Timeseries analysis
Scikit-Learn – Machine learning algorithms

Assignment Problem Set on individual topics

Project Create a custom class for Black-Scholes to return price of
European call and put options and option Greeks
Implement numerical integration class to calculate CDF under
normal distribution using Trapezoidal rule and Simpson’s 1/3rd rule
Fit timeseries ARMA model on GDP and unemployment rates and
perform stationarity tests

1.3. Stochastic Calculus

In this chapter, we will do a deep dive into stochastic calculus which is an indispensable tool to
model random behavior of assets and come up with pricing formulas for derivatives. We will
learn about Brownian motion, stochastic processes such as GBM, OU processes and important
properties such as Markov and Martingales. We will do a deep dive into Ito Calculus and solve
some key stochastic differential equations using Ito integral. We will also learn some important
theorems such as Girsanov theorem and change of measure technique which are essential tools
for derivative pricing. The list of topics is as follows

Brownian Motion and Properties

Stochastic Processes
Parameter estimation
Markov vs Martingale Properties
Ito Calculus
Radon Nikodym Derivative
Girsanov Theorem
Change of Measure
Basic Monte Carlo for Simulation

Assignment Problems on properties of Ito’s Lemma, Ito isometry and Ito

Integral
 Project Create custom library for simulating stochastic processes
(ABM, GBM & Ornstein-Uhlenbeck process)

1.4. Markov Models

In this chapter, we will learn about Markov states and transition probabilities. Markov models
have profound applications in the areas of credit risk, Insurance, quant finance and machine
learning algos such as reinforcement learning. The topics in this module are as follows

Markov Chains
Time Homogeneous – 2 State Model
Time Homogeneous – Multi State Model
Kolmogorov forward and backward equations
Solving state transition probabilities
Time inhomogeneous Markov

Assignment Solving Kolmogorov Equations to obtain transition probabilities

Project Loss distribution of a Credit Portfolio using transition matrix

2) Portfolio Management
2.1. Mean Variance Optimization
We learn about the contributions of Harry Markowitz (the father of modern portfolio theory). We
will discuss the mean variance utility functions; risk return trade off. We will construct the
efficient frontier, tangency portfolio and global minimum variance portfolio. Then we will solve a
few optimization problems using constraints on mean return and variance of the portfolio using
Lagrangian multiplier. The topics are as follows

Modern Portfolio Theory

Efficient Frontier
Global Minimum Variance Portfolio
Sharpe Ratio
Capital Market Line (CML)
Tangency Portfolio
Convex Optimization with return constraints
 Project Calculate optimal allocation of a portfolio of 4 assets given mean
and covariance data. Plot the optimal portfolio on the efficient
frontier

2.2. CAPM & Factor Models

In this chapter, we explore some popular factor models i.e. one factor models such as CAPM
and then multi factor models such as Fama-French model. We will learn about the rationale
behind factors such as value-growth, size, momentum. We will test the significance of the factor
models using historical data. The topics are as follows

CAPM Model
Systematic Risk vs Idiosyncratic Risk
Security Market Line (SML)
Factor Investing
Fama-French model

Case Evaluate performance of factor models 𝑹𝟐 and test the

Study significance of alpha and beta values on historical data

2.3. Black-Litterman model

The Black-Litterman model is a Bayesian approach that enables investors to incorporate their
views regarding the performance of various assets. The components of the model are as follows

Bayes formula – likelihood, prior and posterior

Reverse optimization to get prior
Incorporating Views
Obtain Posterior distribution
Asset Allocation

We will perform one complete numerical example with relative and absolute views of the investor
and compute optimal asset allocation mix.

2.4. Active Portfolio Management

This chapter deals with traditional active portfolio management techniques which are massively
popular in industry today. We will learn about large scale portfolio constrained optimization
problems surrounding alpha, beta, tracking error, concentration, turnover etc. We will learn about
hard constraints, soft constraints, eigen value decomposition to ensure covariance matrices are
positive semi definite to allow for convex optimization.
 Case Construct a real-life model portfolio optimization
Study

2.5. Robust Optimization

This chapter deals with robust estimation of parameters in the presence of uncertainty. The
topics are as follows

Practical problems with mean variance optimization

Robust statistics
Robust estimation of Regression parameters
Shrinkage estimation
Robust resampling techniques
Robust Optimization

Case • Compare the performance of portfolio using Robust

Study optimization vs Traditional Optimization

2.6. Stochastic control

Formulate and solve a dynamic portfolio optimization problem using stochastic control
combining views with market data. Understand the importance of behavioral biases and remove
them. Implement a dynamic portfolio optimization model. Some of the important topics we will
cover in this chapter are as follows

Dynamic Programming
Stochastic Control
Kelly Criterion
Martingale Duality
Risk Sensitive Control
Kalman Filter

Case • End to end implementation of dynamic portfolio optimization

Study using stochastic control
2.7. Statistical Arbitrage (Pairs trading)
Long-short Pairs trading strategy is a classic statistical arbitrage trading strategy where the buy
and sell decision are based on the mean reverting spread between 2 co-integrated assets. In
this chapter we will learn the following topics

Co-integration
OU-fitting
Design a long-short trading strategy
Backtest

Case Identify two co-integrated stocks and implement end to end

Study pairs trading strategy including performance Backtesting

3) Equity Derivatives
3.1. Binomial Tree Model
In this chapter, we will learn about pricing equity derivatives using Binomial Tree model. The
topics we will learn are as follows

Multi-step binomial tree

Replicating Portfolio Approach
Risk Neutral (Martingale) Measure
Vanila European options
Lookback option
Barrier option
Stopping times & American Option

Assignment Question set on Binomial Tree based pricing

Project Custom class for creating Binomial tree-based option pricing
engine for European options
3.2. Black-Scholes Equation
A deep dive into the Black-Scholes model for Option pricing. We will learn the following

Black-Scholes PDE from delta hedging

Generalized Black-Scholes Formula
BSM price for European Call and Put
Put Call parity
BSM Greeks
Feynman-Kac theorem
Green Functions
Implied volatility
Volatility variations

Assignment Exercise Set

3.3. Finite Difference Methods

Given the pricing PDE, one can price a range of options using a method called Finite difference
grids. In this chapter, we will learn various finite difference schemes, their accuracy & stability
and price a few derivatives such as Vanilla and Asian options. The concepts we will learn are as
follows

Numerical sensitivities
Explicit schemes
Implicit schemes
Stability Analysis
Crank-Nicolson
Douglas schemes
Richardson extrapolation
ADI and Hopscotch methods

Project Pricing a Bermudan Option using Finite difference schemes

3.4. Local Volatility Models

In this chapter, we will relax the assumption that volatility is constant. We will make the volatility
level and time dependent. The topics we will cover are as follows

Dupire Local volatility

Alternate asset pricing models
Market Implied volatility smile
 Variance swaps
Implied volatility representation of local volatility
Arbitrage free conditions for option prices
Advanced implied volatility interpolation
Simulation of local volatility

Assignment Exercise Set

3.5. Jump Process

In this chapter, we will incorporate jumps into the dynamics of the asset prices. The topics we
will cover are as follows

Ito’s lemma and jumps

Partial Integro differential equations for jump diffusion
Analytical option prices
Characteristic function of Merton’s Model
Dynamic hedging of jumps with BSM
Finite Exponential Levy process
CGMY and Variance Gamma process
CGMY process

Assignment Exercise Set

3.6. COS method for European Option Valuation

In this chapter we explore the Fourier cosine series for option valuation.

Density approximation via Fourier cosine approximation

Pricing European options using COS method
Error Analysis

Assignment Exercise Set

Case Study Numerical COS method results for GBM, CGMY & VG process

3.7. Change of Measure in Multi-dimensions

In this chapter, we will explore the change of measure technique for a vector of stochastic
processes. The topics we will cover include

Multidimensional SDE systems

Cholesky Decomposition
 Ito’s lemma for vector processes
From ℙ to ℚ in BSM
Affine diffusion processes
Affine Jump diffusion processes

Assignment Exercise Set

3.8. Stochastic Volatility Models

In this chapter, we will treat volatility as a separate stochastic process. The topics we will cover
include

SABR and Heston stochastic volatility models

Pricing PDE
Model Calibration
Heston characteristic function
COS method for Heston model
Heston model with piecewise constant parameters
Bates model

Assignment Exercise Set

Case Study Parameter study for implied volatility skew and smile

3.9. Monte Carlo Simulation

In this chapter, we will explore the Monte Carlo methods for pricing derivatives. The topics we
will cover include

Monte Carlo Integration

Euler-Maruyama scheme
Milstein scheme
Explicit Scheme
Quadratic Exponential Scheme
Antithetic Sampling
Control Variate method
Low discrepancy Sequence
Pathwise sensitivities
Likelihood ratio methods
 Assignment Exercise Set
Project Monte Carlo option pricing for Asian, Digital and Lookback
options

4) Interest Rate & FX Derivatives

4.1. Short rate models

In this chapter, we will learn the popular short rate models and pricing of options on zero coupon
bonds

Spot rate, forward rate

Vasicek Model
CIR model
HJM Framework
Short rate dynamics under HJM Framework
Solution to Hull and White model
Option on zero coupon bonds under Hull and White

Assignment Exercise Set

Case Study Hull & White calibration of parameters

4.2. Interest rate and FX derivatives

In this chapter we will learn to value popular interest rate derivatives

FRAs
Swaps
Caps/Floors
Swaptions
Interest rate Parity
FX Forward, swaps and xCCy
FX Options
Modeling Correlation between IR and FX rates
 Assignment Exercise Set

4.3. RFR – the new regime

With LIBOR transition to RFR, we need to update out understanding in terms of changes to yield
curve construction, valuation of old and new rate products, sensitivity and risk calculations and
hedging strategies.

History of LIBOR Transition

Difference between LIBOR and RFR
Fall Back rates
SOFR proxy by means of OU process
SOFR term rate calculation process
Strips and Rolls
Valuation of SOFR Futures and swaps
Valuation of SOFR future options
Single Currency Curve Construction
o Market data & Knots
o Interpolation styles (log-linear, log-cubic)
o Numerical Solver
o Pricing biases and Risk Considerations
o Impact of CCP basis on curve construction
Multi-Currency Curve Modeling
o Calibration to XCS, FX Swap
o Interdependence between basis, DF and forward FX rates
o Global (Simultaneous) calibration
Sensitivity and Risk
o Analytical computation
o Tangent Mode
o Adjoint Mode (AAD)
o Curve Jacobians
o Ultra-fast curve building
o Modeling Jumps, Spikes and Turn of the Year effect
o Delta, gamma and cross gamma risks
o Swaption pricing and Greeks
o Modeling Volatility Surface
o Forward volatility and correlations
o Value at Risk and Expected Shortfall calculations
Hedging
o Duration Matching
o PCA hedge
o CoVaR hedge
o Example – Hedging SOFR term rate with SOFR futures via jump process
o Example – Hedging Caps and Floors with SOFR future options
 Assignment Exercise Set
Project Develop a Python library with swaps, curves and schedules to
implement a curve solving algorithm. Implement Gradient-
descent, Gauss-Newton and Levenberg-Marquardt methods.
Calculate sensitivities using automatic differentiation

5) Credit Derivatives
In this chapter, we will explore the world of credit derivatives. The topics we will cover include

Structural models
Intensity models
Correlated default times using Copula
Valuation of CDS, CLN and Basket products
Hazard rate calibration
Jarrow-Lando-Turnbull

Assignment Exercise Set

Project Price a fair spread for a portfolio of CDS for a basket CDS

6) AI in risk and finance

In this chapter we will learn about the state-of-the art AI and ML techniques being used today in
finance and risk management. The topics include

Neural Network for Option Pricing

LSTM for stock price prediction
Random forest and XGBoost for accurate return and volatility forecasting portfolio
optimization
Large Language models in Quant Finance
Genetic AI for portfolio selection
Reinforcement learning for portfolio balancing
CNNs for volatility surface modeling