◗ Course Overview.

This course offers a comprehensive introduction to computational methods in fi-

nance, leveraging Python to explore a range of essential topics. Students will
delve into statistical distributions, regression models (including standard OLS and
logistic regression), Taylor expansion, and numerical optimization techniques,
◗ Computational Methods gaining hands-on experience with practical applications in finance. The curricu-
lum also includes a thorough treatment of computational aspects of different port-
in Finance. folio optimization problems, and stochastic processes, together with a concen-
trated focus on the pricing of financial derivatives, particularly option contracts.
FINA 6337 (Section 1). Additionally, the course delves into the valuation of credit instruments, with a
focus on the accurate computation of bond portfolio duration and convexity, im-
parting the technical skills necessary for advanced financial engineering.
Instructor Info.
◗ Course Material.
g Dr. Milivoje (Mickey) Davidovic.
Office Hours: Thursday. ☛ RECOMMENDED BOOKS.
U Time: 10:00 AM - 11:30 AM. ❏ Ali, Hirsa. (2024). Computational Methods in Finance (2nd Edition). Chapman
& Hall: New York, USA.
Location: Hayden Hall 325H.
❏ David, Luenberger. (2013). Investment Science (2nd Edition). Oxford University
http://milivojedavidovic.com Press: Oxford, UK.
@ [email protected]
☛ SOFTWARE.

Canvas, Microsoft Office (Excel, Word), Python (Download Python ), MATLAB® (Create
Course Info. Account), R/R Studio (Download R and Download R Studio).

 Format: Traditional (In-Person). ☛ OTHER MATERIALS.

Class: Thursday. All class lecture slides/notes and other course materials will be posted on Canvas.
U Time: 11:45 AM - 02:15 PM.
◗ Semester Units.
Location: Dodge Hall; R: 070.
UNIT 1: Statistical Distributions and Regression Models.

◗ Course Expectations. UNIT 2: Numerical Methods and Portfolio Optimization.

All participants in FINA 6337 are ex- UNIT 3: Stochastic Financial Modelling.
pected to meet the following course re-
UNIT 4: Pricing Financial Derivatives.
quirements:
UNIT 4: Bond Portfolio Valuation and Price Sensitivity.
• Students are expected to attend
the class regularly.
◗ Goals of the Course.
• Students are expected to submit
their homework and other assign- By the end of the FINA 6337, students will be able to:
ments by the deadline; late as-
signments will not be graded. Goal # 1: Use statistical distributions for financial modelling.

• Students are expected to take all Goal # 2: Model portfolio returns using different factors.
the exams during the semester. Goal # 3: Implement numerical optimization in different portfolio optimization problems.
• All the students are expected to Goal # 4: Model stock price using stochastic processes.
comply with Northeastern Univer- Goal # 5: Price financial derivatives, particularly option contracts.
sity Code of Ethical Conduct Code
of Ethical Conduct. There is a zero Goal # 6: Compare computational aspects of Black-Scholes and Heston models.
tolerance to any form of academic Goal # 7: Price bond portfolio and measure its sensitivity to interest rate changes.
misconduct.
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◗ Course Activities & Grading Scheme.
Grading will include the following activities & exams: (1) Attendance, In-Class Participation and Engagement; (2) Homework;
(3) Two Midterm Exams (in-class exams, 75 minutes); (4) Group Project; (5) Final Exam (in-class exam, comprehensive). The
overall final grade is based on a weighted grade system.

❏ Activity 1: Attendance, In-Class Participation and Engagement. (10%)

❏ Activity 2: Homework. (10%)

❏ Activity 3: Midterm Exams. (30% total, 15% each)

❏ Activity 4: Group Project. (20%)

❏ Activity 5: Final Exam. (30%)

Each class activity is aimed to help students to better understand the class material and to implement their knowledge in
real-life financial modelling, which is in line with the educational concept of experiental learning.

☛ Homework.

Homework will be assigned regularly over the course of the semester, and there will be at least two extensive problem sets
that are posted to Canvas. Each assignment will consist of several computational problems that are germane to the material
that we have covered in the class lectures. All students are expected to complete their assignments within ten days (check
Canvas for official due dates and deadlines) using Python (exclusively). The goal of the problem sets is to properly incentivize
students to review and study the course content, and to hone their technical fluency and skills.

☛ Midterm Exams.

We will have two in-class midterm examinations during the semester, in accordance with the official course schedule (given
below). Each midterm will feature practical and computational exercises that capture the essence of the lecture material. The
midterms will always cover topics that we have seen previously in lecture (see below for the official list of topics). If a student
cannot take the midterm on the scheduled date, for any reason, the weight of the midterm will shift to the final. Students will
have 60 minutes to complete each exam, which will be closed book and closed notes. Exams will never be given virtually.

☛ Group Project.

The case report will be a group empirical project (of some 20-25 pages in length), written by a team of 3-4 students on a
topic that is relevant to the course material. Each team must submit its work via Canvas by the official deadline, which will
be announced within the first two weeks of the semester. The project aims to help students improve their mathematical skills
and to implement and apply computational theories for the sake of real-world financial modeling. All students are expected
to join a team and to fully engage in the enjoyment of cooperative learning. A detailed specification of the project and its
requirements will be posted to Canvas within the first two weeks of the course.

☛ Final Exam.
The final exam will be held at the end of the semester, during finals week (exact time and date in accordance with the official
university schedule). The final will consist of numerical and theoretical problems, descriptive material, and deeper conceptual
questions. All students are expected to sit for the in-person final, which will be comprehensive, spanning everything that we
have covered throughout the semester.

Each listed activity will be graded, and the points will be posted in the grade section on Canvas. If the sum of the activities
exceeds 100 points, then the raw points will be scaled down to 100 to reflect the above weighted grade system. The grading
scale that will be utilized as follows: [A]: 96-100, [A-]: 91-95, [B+]: 86-90, [B]: 81-85, [B-]: 76-80, [C+]: 71-75, [C]: 66-70,
[C-]: 61-65, [G]: < 61. The final latter grade will be assigned to each student as determined in this section at the end of the
semester. If the weighted average score is between two subsequent ranges (and includes decimals) the score will be adjusted
to the higher cut-off point, and the final letter grade will be assigned accordingly. The instructor reserves the right to make
an adjustment to the final grades to benefit all students equally. Late assignments will not be graded.

2
◗ Topics to Be Covered.
,
The course schedule is tailored to fit the official Northeastern academic calendar for 2022-2023 academic year. The following
topics will be covered during the semester:

❏ PART I: Statistical Distribution, Regression, and Numerical Optimization.

❖ WEEK 1.
✦ REVIEW of SYLLABUS; Software Installation.
✦ Lecture 1 & Lecture 2 (in-class): Statistical Distrubutions.
✦ Lecture 1 & Lecture 2 (in-class): Coding Appendix (Python).

❖ WEEK 2.
✦ Lecture 3 & Lecture 4 (in-class): Linear Regression vs. Logistic Regression.
✦ Lecture 3 & Lecture 4 (in-class): Coding Appendix (Python).

❖ WEEK 3.
✦ Lecture 5 & Lecture 6 (in-class): Introduction to Numerical Optimization.
✦ Lecture 5 & Lecture 6 (in-class): Coding Appendix (Python).

❏ PART II: Efficient Diversification and Portfolio Optimization Algorithms.

❖ WEEK 4.
✦ Lecture 7 & Lecture 8 (in-class): Efficient Diversification.
✦ Group Project: Initial Presentation (in-class).
✦ Lecture 7 & Lecture 8 (in-class): Coding Appendix (Python).

❖ WEEK 5.
✦ Lecture 9 & Lecture 10 (in-class): Portfolio Optimization Algorithms.
✦ Lecture 9 & Lecture 10 (in-class): Coding Appendix (Python).

❖ WEEK 6.

✦ MIDTERM 1: (in-class): Class Lectures, Week 1 to Week 5 (inclusive).

❏ PART III: Stochastic Processes in Finance and Derivatives Pricing.

❖ WEEK 7.
✦ Lecture 11 & Lecture 12 (in-class): Stochastic Processes for Finance.
✦ Lecture 11 & Lecture 12 (in-class): Coding Appendix (Python).

❖ WEEK 8.
✦ Lecture 13 & Lecture 14 (in-class): Pricing Financial Derivatives (Part I).
✦ Lecture 13 & Lecture 14 (in-class): Coding Appendix (Python).

❖ WEEK 9.
✦ Lecture 15 & Lecture 16 (in-class): Pricing Financial Derivatives (Part II).
✦ Lecture 15 & Lecture 16 (in-class): Coding Appendix (Python).

❏ PART IV: Valuation of Credit Instruments and Bond Portfolio Price Sensitivity.

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 ❖ WEEK 10.
✦ Lecture 17 & Lecture 18 (in-class): Pricing Credit Instruments (Loans and Bonds).
✦ Lecture 17 & Lecture 18 (in-class): Coding Appendix (Python).

❖ WEEK 11.

✦ MIDTERM 2: (in-class): Class Lectures, Week 7 to Week 11 (inclusive).

❖ WEEK 12.
✦ Lecture 19 & Lecture 20 (in-class): Bond Portfolio Price Sensitivity.
✦ Lecture 19 & Lecture 20 (in-class): Coding Appendix (Python).

❖ WEEK 13.

✦ Group Project: Final Presentation (in-class).

♣ Final Exam (Comprehensive): Dec 12, 2024; Time: 11:45am - 02:15pm; Dodge Hall, Room: 070.
Note: This is a tentative class schedule, and I reserve the right to slightly modify this schedule. However, all the changes will
be announced in advance and will not affect the performance in the class.

◗ Attendance, Ethics, & Technology Policy.

Students are expected to attend classes regularly, according to the university policy. If there are some objective obstacles to
attend the class, you should provide some explanation and necessary documentation to obtain an excused absence. Excused
absences will only be permitted when the university recognizes the absence as an excused absence. Attendance will be taken
randomly during the semester (4-5 times), and will affect your grade (up to 10%, together with class activities).

Academia is ultimately about the intellectual exchange of ideas based on intellectual honesty and academic dignity. Students
are required to comply with the Code of Ethical Conduct set by the University. Specifically, "Northeastern University encour-
ages and expects all members of the community to conduct themselves according to the highest ethical standards. All of our
endeavors – including research, academic, business, athletic, community relations and student affairs – must be grounded in
ethical principles, conducted according to the utmost standards of integrity, and carried out in compliance with legal and reg-
ulatory requirements and university policies." There is a zero tolerance to any form of academic misconduct that is explicitly
mentioned in the Code of Ethical Conduct (Code of Ethical Conduct). In addition, all the students are expected to comply with
Code of Student Conduct (Code of Student Conduct)

Personal electronic devices should not be used during class so that students are able to focus on the classroom experience.
Students should silence cell phones and other devices so as not to distract others in the classroom.

◗ Other University Policies & Resources.

☛ Access and Accommodations.

The Disability Resource Center serves Northeastern students who have documented disabilities as defined by the Americans
with Disabilities Act as Amended (ADAAA) of 2008. Under this definition, a person with a disability is one with a physical,
mental, emotional, or chronic health impairment that substantially limits one or more major life activity. The exact instruc-
tions to request accommodations are provided in the following link Accessing Accommodations. For any further information
please visit the DRC website (Disability Resource Center).

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☛ Diversity, Equity and Inclusion.

At Northeastern University, diversity and inclusion are vital to learning and discovery. The value of diversity and inclusion is
very much about experience — experiencing people, cultures, perspectives, and viewpoints different from what we know. It’s
about the way in which we engage with the world, the opportunity to learn from new perspectives, a core value for the Uni-
versity, an essential element of contemporary life, an expression of cultural pride, and a reflection of our campus, community,
and global partners.

The Office of Diversity, Equity and Inclusion promotes the University’s commitment to equal opportunity, affirmative action,
diversity, and social justice while building a climate of inclusion on and beyond campus. The office works with students, fac-
ulty, and staff to identify and address sources of conflict, bias, and possible differential treatment, and provide information on
additional campus resources, including the Office of University Equity and Compliance, the University Ombuds, and Human
Resources Management, among others, to create an inclusive environment for all. We develop programs, advise and con-
sult on policies, build outreach to external organizations, and provide services to students, faculty, staff, and the community.
Please check the following link for more details: Diversity, Equity and Inclusion.

☛ Class Cancellation Method.

Notifications of class cancellations will be made through Canvas and/or e-mails with as much advance notice as possible.
Please check the announcements regularly before coming to class. If the class has to be canceled some unusual events (for
example, harsh weather conditions), the class will be held online. All make up classes will be announced well in advance so
that the students will have enough time to get ready for the class, regardless of the delivery mode.

☛ Title IX Policy.

Northeastern University is committed to providing equal opportunity to its students and employees, and to eliminating dis-
crimination when it occurs. In furtherance of this commitment, Northeastern University strictly prohibits discrimination and
harassment on the basis of race, color, religion, religious creed, genetic information, sex, gender identity, sexual orientation,
age, national origin, ancestry, veteran, or disability status.

This Policy articulates how the university will respond to reports of discrimination on the basis of sex (as defined below as
Prohibited Offenses), in compliance with Title IX of the Education Amendments of 1972 (“Title IX”), as well as the Jeanne
Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (“Clery Act”), and the Violence Against Women
Reauthorization Act (“VAWA”) of 2013 as defined below. For more details about the rights and responsibilities under Title IX,
please check the following link: Title IX Rights and Responsibilities.

Reports of discrimination based on a Protected Category (race, color, religion, religious creed, genetic information, sex (in-
cluding pregnancy or pregnancy related condition), gender, gender identity, sexual orientation, age, national origin, ancestry,
veteran or disability status) are addressed by the university’s Policy on Equal Opportunity. Reports of allegations of Sexual As-
sault, Sexual Harassment, Domestic Violence, Intimate Partner Violence, Dating Violence, Stalking and Retaliation that occur
outside the jurisdiction of this policy, including those allegedly occurring within the context of a university education program
or activity or outside of the United States, are addressed by the University’s Policy Prohibiting Sexual and Gender-Based Ha-
rassment. All reports of alleged discrimination can be reported to the Office for University Equity and Compliance (“OUEC”)
at Office for University Equity and Compliance.

5
◗ A Newspaper Story: Spotlight on Spoofing.

In 2014, regulators signaled that they would focus their efforts on investigating and prosecuting individuals engaged in spoof-
ing. True to their word, 2015 saw the nation’s first criminal conviction of a trader for spoofing in the U.S., as well as an increase
in civil enforcement actions against traders who allegedly engaged in spoofing. Securities and futures exchanges also ramped
up their efforts to detect, deter, and punish spoofing. The expectation is that regulators and self-regulatory organizations will
continue to actively monitor the markets using increasingly sophisticated technology to detect spoofing. This is likely to lead
to an increase in the number of enforcement actions and prosecutions for spoofing in 2016.

Spoofing can take many different forms. Typically, spoof-

ing involves a trader placing a large number of buy or sell
orders that he never intends to complete for the purpose
of artificially inflating or lowering the market price of a se-
curity, futures contract, or other financial instrument that
is traded on an exchange. Once the market moves, the
trader immediately cancels his open orders and takes ad-
vantage of the artificially high or low price with orders on
the opposite side of the market that he intends to close
out. While spoofing and other types of market manipulation
have occurred for years, regulators and exchanges have
seen an increase in spoofing during this age where trad- Figure 1: The New York Stock Exchange, New York City.
ing is dominated by high frequency and algorithmic trad- Photo ©Justin Guariglia—xPACIFICA/Redux
ing.

Activity that regulators and self-regulatory organizations may focus on in connection with their efforts to detect spoofing include
the following: (1) layered or lopsided orders, (2) “flashed" orders that appear designed to move a flat market, (3) a pattern of
orders being entered and cancelled prior to execution, (4) a high ratio of cancelled orders to executed trades relative to other
traders, (5) a high ratio of modified orders relative to other traders, (6) cancelled orders that are relatively large to the average
order size of the security or futures contract, (7) cancelled orders that are close to the best bid/offer, (8) order cancellations
that occur a short time after being entered, (9) a concentration of modified or cancelled orders during certain windows during
the trading day, or (10) an atypical concentration of orders within an order book.

Regulators often use anti-fraud and anti-manipulation statutes to punish spoofing. For example, the Securities and Exchange
Commission (“SEC") pursues actions against alleged spoofers under the anti-fraud provisions of Section 10(b) of the Securities
Exchange Act of 1934, SEC Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The U.S. Department of Justice (“DOJ")
also can use the mail and wire fraud statutes to punish spoofers.

When Dodd-Frank was signed into law on July 21, 2010, the Commodity Futures Trading Commission ("CFTC") received a new
tool explicitly addressing spoofing. Dodd-Frank amended the Commodity Exchange Act ("CEA") and expressly made spoofing in
the commodity futures markets a violation of federal law. Specifically, 7 U.S.C. § 6c(a)(5)(C) makes it “unlawful for any person
to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that. . . is, is of the character of, or
is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution)."
On May 28, 2013, the CFTC released interpretive guidance regarding what would be considered spoofing. According to the
CFTC, "a market participant must act with some degree of intent to violate the ‘spoofing’ provision. Reckless trading, practices,
or conduct would not violate [the prohibition on ‘spoofing’]." The CFTC went on to say that “orders, modifications, or cancel-
lations would not be considered ‘spoofing’ if they were submitted as part of a legitimate, good-faith attempt to consummate a
trade. . . [L]egitimate good-faith cancellations of partially filled orders would not violate [the] CEA."

Source: Jones Day