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 more than 60 countries and hundreds of banks across the globe. Also, many of the examples discussed throughout the module are based on American, European and Asian models.
This module is accredited by the Chartered Financial Analyst Institute (CFA) and all of the content is based on the CFA examination.
As well as creating an online profile aimed at employers in more than 60 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|
|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|
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|
|Individual Project||1||12 &14 18||Lecture discussion|
|7 or 10 tests. The best 5 to count for 2% each||10||20 to 50 minutes||1 11 & 15 17||ELE Moodle feedback|
|Online Written Examination||89||1 to 2 hours||1 11 & 15 17||ELE Moodle feedback|
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|
|All||Online Written Examination (100%) 1- 2 hours||1 11 & 15 17||August|
There are no re-sit for the weekly tests. For the weekly tests the mark assigned is the mark that the student has received on the re-sit final examination.
- 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:
- Solving the Liquidity Conundrum
- Ethical Use of Derivatives and Fixed Income Instruments: Nassim Taleb and Daniel Kahneman: Reflection on a Crisis
There are 13 topics, which need to be covered in 9 weeks
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