This module is available on the MSC Finance and Investment, MSC Finance and Management, MSC Financial Mathematics, MSC Accounting and Finance, MSC Marketing and Financial Services, MSC Financial Mathematics, MSC Economics and all other University of Exeter Business School MS programs, aims to equip you with theoretical frameworks and numerical methods to evaluate credit instruments and financial derivative instruments in the stock, equity, FX and interest rate markets. It covers the analysis of the five distinct valuation methods, including Forwards, Futures, SWAPs, and options via Binomial Trees and Black and Scholes model as well as Fixed Income Instruments and Securitization techniques and the numerical methods to price derivatives in the equity market.
Prerequisite: The students signing for this class are expected to have good command of the University of Exeter Business School Approved Financial Calculator, MS Excel, and basic financial concepts of NPV, Bond and Stock Pricing.
This module helps students build an online professional profile, allowing them to connect with former students and potential employers internationally in about 100 countries and hundreds of banks across the globe. Also, many of the examples discussed throughout the module are based on American, European and Asian markets.
This module is accredited by the Chartered Financial Analyst Institute (CFA) and all of the content is based on the CFA level examination.
As well as creating an online profile aimed at employers in about 100 countries and hundreds of banks across the globe, students also develop their understanding and evaluation of derivatives, financial engineering skills, and risk assessment skills.
All of the resources for this module are available on the ELE (Exeter Learning Environment).
Full module specification
|Module title:||Derivatives Pricing|
BEAM031 Financial Instruments
|Duration of module:||
Duration (weeks) - term 2: |
This module is aimed to prepare the student for the profession of Derivatives Trader or the hedging responsibility of Financial Director. It starts with the historical precedents, runs through current developments and emphasizes the technical details of valuation of all derivatives and fixed income products. This module aims to equip students with an understanding of the theoretical framework necessary to value and analyse derivative financial instruments in the equity, interest rate and other markets, and with a practical appreciation of the techniques used to value derivatives and use them in real-world settings. It covers the analysis of binomial trees, the Black and Scholes model and other numerical methods to price derivatives in the equity, currency, fixed income and other markets. The module will also introduce various interest rate options and the models commonly used to price these products. Students will be required to become familiar with the standard forms of options contracts, valuation and hedging. The module examines a variety of distinct models from both theoretical and technical perspectives.
ILO: Module-specific skills
- 1. price various derivatives and credit instruments and evaluate critically their usefulness in risk reduction applications using MS Excel and Financial Calculators.
- 2. able to price Forwards
- 3. able to price Futures
- 4. able to price SWAPs
- 5. understand the forms of basic derivative contracts and important hedging strategies
- 6. understand the theoretical background and be able to do Binomial Option Pricing
- 7. understand the theoretical analysis of the Black and Scholes model, and its relationship to the Binomial Option Pricing Model
- 8. price financial options using both analytical and numerical techniques
- 9. understand some popular interest rate option products and how they can be priced including all kinds of fixed and variable SWAPs and other fixed income instruments
ILO: Discipline-specific skills
- 10. improve their knowledge of mathematical finance and be able to apply computational methods in pricing option, derivative and fixed income products.
- 11. develop rigorous theoretical arguments based on mathematical and analytical reasoning;
- 12. rigorously to analyze problems in finance, especially derivatives and fixed income pricing;
- 13. interpret financial data and problems in the light of established theories;
- 14. access empirical research literature and critically appraise it;
- 15. use relevant databases, existing research literature and techniques to conduct a detailed investigation of problems arising in financial markets and models;
ILO: Personal and key skills
- 16. develop their interpersonal skills and group working through the LinkedIn assignment
- 17. show competence in debate and discussion through active participation in class
- 18. develop computing skills
- 19. plan and manage his/her own study;
- 20. make appropriate use of learning resources, including sophisticated computer datasets;
- 21. analyze critically problems arising in both academic and practical contexts
- 22. effectively results and achievements of individual projects.
Learning activities and teaching methods (given in hours of study time)
|Scheduled Learning and Teaching Activities||Guided independent study||Placement / study abroad|
Details of learning activities and teaching methods
|Category||Hours of study time||Description|
|Form of assessment||Size of the assessment (eg length / duration)||ILOs assessed||Feedback method|
|Individual Project||2 weeks||16 & 18-22||Verbal and written|
|Online tests||40 minutes||12 & 14-18||Verbal and written|
Summative assessment (% of credit)
|Coursework||Written exams||Practical exams|
Details of summative assessment
|Form of assessment||% of credit||Size of the assessment (eg length / duration)||ILOs assessed||Feedback method|
|Mid-term exam||15||40 minutes||12 & 14 18||Verbal & written|
|Online written examination||85||1 hour||1-12 & 15-18||Verbal & written|
Details of re-assessment (where required by referral or deferral)
|Original form of assessment||Form of re-assessment||ILOs re-assessed||Timescale for re-assessment|
|Mid-term & online written examination||Online Written Examination||1-12 & 15-18||August|
If you fail the online written examination, you will be advised of this and will be allowed to sit the referred examination once. The referred examination will take place in August in a computer room on campus. There is no resit opportunity for the mid-term exam. If you fail the module overall, then you will be re-assessed 100% via the online written exam.
- Forward Markets and Contracts
- Futures Markets and Contracts
- Option Markets and Contracts
- Swap Markets and Contracts
- Interest Rate Derivative Instruments
- Using credit derivatives to enhance return and manage risk via CDS (Credit Default Swaps)
- Valuing Bonds with Embedded Options
- Mortgage-Backed Sector of the Bond Market
- Europe's whole loan sales market burgeoning as mortgage credit market comes of age
If time permits:
10. Solving the Liquidity Conundrum
11. Ethical Use of Derivatives and Fixed Income Instruments: Nassim Taleb and Daniel Kahneman: Reflection on a Crisis
This module is centred on the valuations techniques, not financial derivatives and fixed income instruments. The topics highlighted in bold above contain new valuation techniques and will be focused on for more than a week. For the lectures when the valuation techniques are known, will be covering two lectures per week. (Please note that more than one topic may be covered in each lecture).
Indicative learning resources - Basic reading
Don M. Chance, 2003, Analysis of Derivatives for the CFA® Program. 6th ed. Charlottesville, Virginia 22903: AIMR
Frank J. Fabozzi, 2005, Fixed Income Analysis for the CFA® Program. 2nd ed. Charlottesville, Virginia 22903: AIMR
Useful additional texts are:
Hull, J., 2000, Options, Futures and other derivatives, 3rd ed. London. Prentice Hall
Kolb, R.W., 2002, Futures, Options, & Swaps, Blackwell
Chance, D., 1997, Introduction to Derivatives, Thomson Learning
Wilmott, P., 2001, Paul Wilmott Introduces Quantitative Finance, 2nd edition, John Wiley
Wilmott, P., S. Howison and J. Dewynne, 1995, The Mathematics of Financial Derivatives: a Student Introduction, Cambridge University Press
Clewlow, L. and C. Strickland, 1998, Implementing derivative models, John Wiley
Haug , Espen Gaarder, 2007, Derivatives: Models on Models, John Wiley & Sons
Taleb , Nassim Nicholas, 1997, Taleb on Risk: Dynamic Hedging, John Wiley & Sons
Taleb , Nassim Nicholas, 2001, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Penguin
Taleb , Nassim Nicholas, 2007, The Black Swan: The Impact of the Highly Improbable, John Wiley & Sons
Das, Satyajit, 2006, Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives, Financial Times/ Prentice Hall
Partnoy, Frank, 1998, FIASCO: Blood In the Water on Wall Street: Guns, Booze and Bloodlust - The Truth About High Finance, Profile Business
Osband, Kent, 2001, Iceberg Risk: An Adventure in Portfolio Theory: An Adventure in Portfolio Theory, Texere Publishing, US
Lowenstein, Roger, 2002, When Genius Failed: The Rise and Fall of Long Term Capital Management, Fourth Estate
Bernstein, Peter L., 1998, Against the Gods: The Remarkable Story of Risk, John Wiley & Sons
Ross, Sheldon M., 2002, An Elementary Introduction to Mathematical Finance
Etheridge, Alison, 2002, A Course in Financial Calculus
Jacque, Laurent, 2010, Global derivative debacles: from theory to malpractice
Module has an active ELE page?
Indicative learning resources - Web based and electronic resources
The following websites are worth exploring, particularly if you are new to the subject. Please understand that material from these must not be cut and pasted into assignments.
www.cbot.com -- Chicago Board of Trade
www.cme.com -- Chicago Mercantile Exchange
Indicative learning resources - Other resources
Last revision date