MAROUN SEMAAN FACULTY OF ENGINEERING AND ARCHITECTURE DEPARTMENT OF INDUSTRIAL ENGINEERING AND MANAGEMENT COURSE SYLLABUS ENMG 625 Financial Engineering II Fall 2024 - 2025

General Course Information

Table 1: Overview of Course Information

General Information

Course Number	ENMG 625
Course Title	Financial Engineering II
Number of Credits	3
Course Level	graduate
Course Format	Face-to-Face
Pre-requisite Courses	INDE 301, ENMG 602 or equivalent
Required/Elective	Elective
Meeting Schedule
Meeting Location

Course Coordinator, Instructors and Teaching Assistants

Table 2: Contact Information for Course Coordinators, Instructors, and Teaching Assistants

Name	Role (Instructor, Coordinator, TA,)	Office Location	Office Hours	Extension	E-mail
Bacel Maddah	Instructor	Bechtel 319	M 2-5	3551	bm05@aub.edu.lb

Course Description

Financial Engineering involves scientific tailoring of financial products. In this course, ourmain focus is on derivative securities. A derivative security is a financial instrument whosevalue depends on another “underlying” financial (or tangible) asset. Derivative securitiesare used (i) to hedge against the risk of the underlying asset; or (ii) to make money byspeculators anticipating a price change (ignoring market efficiency). Specifically, we willstudy options on equity (stock) and on interest rates (interest rate derivatives). The studyof options in the last three decades has fueled the interest of the scientific community inFinance. The theoretical and practical success on the options front is among the mainreasons for the emergence of Financial Engineering. Among the most prominent successstories is the development of the options pricing technique by Black and Scholes, which continues to serve as the main tool for pricing options and other securities. This well-knowntechnique is based on arbitrage pricing and on modeling the stock price as a geometricBrownian motion. We will present the theoretical foundation of this techniques thoroughlyby rigorously deriving the Black-Scholes equation for pricing derivatives and its analyticalapplication to plain-vanilla options. Then, since the pricing of several (so-called exotic)options require numerical analysis, we will present numerical pricing methods such as thefinite-difference method and Monte-Carlo Simulation. Closely related topics will be alsodiscussed such as volatility modeling and credit risk analysis. Finally, time-permiting, wewill study techniques for maximizing a portfolio growth over time.The main objectives of the course is for the student to acquire familiarity with derivativesecurities and the ability to apply Black-Scholes-type techniques for pricing these securities.A secondary objective is to expose the student to stochastic processes and their applicationsin Finance.INDE 301

Course Learning Outcomes

Upon completion of the course, students will be able to:

CLO1. Apply fundamental probability and stochastic processes to model asset price dynamics

CLO2. Price basic and advanced financial derivatives using discrete and continuous models

CLO3. Analyze and evaluate exotic options and non-standard derivative contracts

CLO4. Implement computational methods for derivative pricing and risk management

CLO5. Model volatility and credit risk in financial markets using statistical and analytical tools

CLO6. Apply financial engineering techniques to portfolio growth and interest rate derivatives

CLO7.

CLO8.

CLO9.

CLO10.

CLO11.

CLO12.

CLO13.

CLO14.

CLO15.

Program Learning Outcomes Addressed in The Course

Explicitly indicate which of the program learning outcomes are addressed in the course.

PLO1. Advanced Core Knowledge in the Discipline: Analyze core concepts and theories in different areas of study in their discipline

PLO2. Oral Communication Skills: Demonstrate scholarly communication skills in clear, detailed and well-structured scientific oral format consistent with high standards of their discipline.

PLO3. Research Methods: Analyze qualitative and quantitative information while conducting or applying research related to their graduate program

PLO4.

PLO5.

PLO6.

PLO7.

PLO8.

PLO9.

PLO10.

PLO11.

PLO12.

PLO13.

PLO14.

PLO15.

Course Resources and References

Indicate textbook title, author, and year. Include a link to the Moodle page or the course web page.

Luenberger, D. G. (1998). Investment Science, Oxford University Press.

Course Outline

Include the topics covered and learning activities (assignments, projects, term papers, etc.) with their due dates. Indicate the alignment of topics/ learning activities with the Course Learning Outcomes.

Table 3: Course Schedule Overview

Week	Date	Topic	Learning Activities and Due Dates	Alignment with CLOs
1	Probability primer – basic probability theory, random variables, distribution functions, joint distributions
2	Models of asset dynamics – binomial lattice, additive/multiplicative models, random walk, Brownian motion, Ito processes, Ito’s lemma
3	Basic option theory – option types, values, combinations, put-call parity, binomial pricing, real options, risk-neutral pricing
4	Advanced option theory – Black-Scholes model, call option formula, delta-hedging, replication, Martingale pricing
5	Exotic options – shout, binary, forward start, chooser, compound, Asian, barrier, lookback, exchange options
6	Volatility modeling – historical vs. implied volatility, volatility smile/skew, surfaces, EWMA, GARCH, MLE
7	Computational methods – finite-difference for PDEs, Greeks estimation, Monte Carlo simulation, variance reduction
8	Interest rate derivatives – binomial pricing, adjustable-rate loans, forward equation, term structure models, continuous-time solutions
9	Credit risk and derivatives – default risk modeling, credit ratings, CDS, basket CDS, Credit Metrics, Value at Risk
10	Portfolio growth – log-utility and power utility models, continuous-time growth, mean-variance, log-optimal pricing
11
12
13
14
15

Indicate mode of delivery as Lecture, Recitation, Laboratory, Team-based Learning, etc.

Include all methods for assessing student achievement, including assessment rubrics for evaluating the learning activities.

Grading Criteria

Table 4:Evaluation Criteria and Percentage

Type of Evaluation	Percentage
Midterm Exam	35%
Final Exam	35%
Homework	20%
Paper	10%
Total	100%

Course Policies

Attendance

For undergraduate courses:

“Students who miss more than one-fifth of the sessions of any course prior to the withdrawal deadline can be withdrawn from the course by the instructor.”

For graduate courses:

“A student who is absent without excuse for more than one third of the number of sessions in any course may be dropped by the instructor of the course”.

Credit Hour Policy

“This course follows AUB Credit Hour Policy for three credit courses. This course meets twice weekly for 3 academic hours per week. The course also includes independent out-of-class assignments for academic hours per week.”

Submissions and Due Dates

Click or tap here to enter text.

Missing Projects/Assignments

Homework problems will be assigned frequently. Students are encouraged to spend plentyof time working on the homework problems and to discuss their solution with each other.However, each student should write the final version of the homework individually

Final Examinations:

Please note that students are expected to be on-campus and available to take a final examination for any of their courses at anytime during the final examination period. Students and professors will be notified of the final examination schedule being posted on the Office of the Registrar website as soon as feasible after the change of schedule period (drop and add).

Make-up Quizzes and Exams

Click or tap here to enter text.

Group Work

Students (in groups of 2) will choose with the assistance of the instructor a paper on a relevant topic. Each group will (i) write a summary, with a critique of the paper, (ii) receiveand incorporate instructor’s feedback, and (iii) present their findings to the class.

Teaching Strategies and Technology Tools

Click or tap here to enter text.

Use of AI in the Course

Click or tap here to enter text.

University Rules and Regulations

General Academic Information

Undergraduate Academic Information

Graduate Academic Information

University - Course Withdrawal Policy

A student can withdraw from only one required course per semester. Students who wish to withdraw from more than one required course in any given semester must petition the appropriate faculty committee for permission to do so. Check Withdrawal Information from undergraduate and graduate catalogue.

Academic Integrity (cheating and plagiarism)

Please refer to AUB Student Code of Conduct, in particular section 1.1, which concerns academic misconduct including cheating, plagiarism, in-class disruption, and dishonesty. Please be aware that misconduct is vigorously prosecuted and that AUB has a zero tolerance policy. Course policy is that credible evidence of cheating will result in course failure.

Accessibility Statement to Acknowledge the Unique Learning Needs of Students with Disabilities

AUB strives to make learning experiences as accessible as possible. If you anticipate or experience academic barriers due to a diagnosed disability (including learning disability, mental health, chronic or temporary medical conditions), please contact the Accessible Education Office as soon as possible in order to help establish reasonable accommodations and facilitate a smooth learning process: accessibility@aub.edu.lb; +961-1-350000, x3151; West Hall, 338.

Failure to implement the accommodations provided by the Accessible Education Office constitutes a violation of AUB's non-discrimination policy, and may be reported to the Equal Opportunity Officer/Title IX Coordinator who also serves in the role of Section 504 Coordinator, at 01-350000 ext. 2514, titleix@aub.edu.lb.

Non-Discrimination and Anti-Discriminatory Harassment, including Sexual Harassment at AUB https://www.aub.edu.lb/President/oeo-titleix/Pages/syllabus.aspx

In line with its commitment to the principle of equal opportunity in admission, education, and employment, AUB policies protect you from discrimination and discriminatory harassment, including sex discrimination and sexual harassment, in alignment with the objectives of Title IX of the U.S. Education Amendments of 1972.

The policies are applicable to all the AUB Community including: officers, faculty, staff, academic appointees, students (including medical interns and residents), visiting students, alumni, trainees, visitors, contractors, subcontractors, suppliers, located on campus and at AUB Medical Center, Advancing Research Enabling Communities Center (AREC), or any other facility or program affiliated with the University. The “AUB Community" also includes the dependents and domestic employees of faculty and staff dwelling on campus and at AREC.

If you think you have experienced discrimination, discriminatory harassment, or sexual harassment, we encourage you to inform the Title IX Coordinator, Mitra Tauk at 01-350000 ext. 2514, titleix@aub.edu.lb, report to a Title IX deputy at your faculty or at any other faculty (www.aub.edu.lb/titleix), or report online (www.aub.ethicspoint.com).

​​​

AUB Grading System

https://www.aub.edu.lb/Registrar/Pages/academic-information.aspx

Numeric Course Grade to Letter Course Grade Grade Conversion Chart Table 5:Numeric Course Grade to Letter Course Grade Table 6: Grade Conversion Chart Starting with Numeric Course Grade /100 Corresponding Course Letter Grade Course Letter Grade Quality Points < 60 F A+ 4.3 60 D A 4.0 61–62 D+ A– 3.7 63–65 C– B+ 3.3 66–68 C B 3.0 69–71 C+ B– 2.7 72–74 B– C+ 2.3 75–78 B C 2.0 79–82 B+ C– 1.7 83–86 A– D+ 1.3 87–92 A D 1.0 93–100 A+ F 0.0

Note: The GPA at AUB is capped at 4.0​​

I ​P ​PR ​W NP ​Incomplete ​Pass ​In Progress ​Withdraw ​No Pass