Module

Derivatives Pricing

Module description

Summary:

This module aims to equip you with theoretical frameworks and numerical methods to evaluate credit instruments and financial derivative instruments in the bond, 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-Scholes model. Fixed Income Instruments, securitisation techniques, and the numerical methods to price derivatives in the equity market will also be covered.

Prerequisite: The students are expected to have a good command of the University of Exeter Business School Approved Financial Calculator, MS Excel, and basic financial concepts such as NPV, Bond, and Stock Pricing.

Additional Information:

Internationalization

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. In addition, many of the examples discussed throughout the module are based on American, European, and Asian markets.

External Engagement

The Chartered Financial Analyst Institute (CFA) accredits this module, and all of the content is based on the CFA level examination.

Employability

Mastery of this module's content will enable the students to develop intellectual sophistication in the areas of derivatives/fixed income pricing, financial engineering, and risk management. Derivatives and Fixed income mastery potentially open up an exciting range of career opportunities across multiple industries such as investment banks, hedge funds, consultancies, and insurance firms. 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.

Sustainability

All of the resources for this module are available on the ELE (Exeter Learning Environment).

Full module specification

Module title:Derivatives Pricing
Module code:BEAM035
Module level:M
Academic year:2021/2
Module lecturers:
  • Dr Stanley Gyoshev - Convenor
Module credit:15
ECTS value:

7.5

Pre-requisites:

BEAM031 Financial Instruments

Co-requisites:

None

Duration of module: Duration (weeks) - term 2:

10

Module aims

The main goal of this module is to prepare the students for a quantitative finance career which includes (but is not limited to) trading, risk management, and structures in the areas of fixed income and derivatives. This module will be useful to prepare the student for the Derivatives Trader's profession and the hedging responsibility of the Financial Director.

Towards the end of the module, the students will understand the mechanisms, risks, and pricing techniques of various products such as forward and futures contracts, European and American options, bonds, swaps, interest rate derivatives, etc. While the treatments of topics are somewhat quantitatively oriented, the practical relevance of the module's content will be highlighted by real-world examples and case studies. 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 critically evaluate their usefulness in risk reduction applications using MS Excel and Financial Calculators;
  • 2. price Forwards, Futures, and SWAPs;
  • 3. identify the forms of basic derivative contracts and essential hedging strategies;
  • 4. outline the theoretical background and implementation of the Binomial Option Pricing Model;
  • 5. apply the Black-Scholes model for option pricing and compare its relationship to the Binomial Option Pricing Model;
  • 6. price financial options using both analytical and numerical techniques;
  • 7. explain 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

  • 8. improve their mathematical finance knowledge and apply computational methods in pricing options, derivatives, and fixed income products;
  • 9. evaluate rigorous theoretical arguments based on mathematical and analytical reasoning;
  • 10. rigorously analyse problems in finance, especially derivatives and fixed income pricing;
  • 11. interpret financial data and problems in the light of established theories.

ILO: Personal and key skills

  • 12. analyse critically problems arising in both academic and practical contexts;
  • 13. develop computing skills;
  • 14. plan and manage his/her own study;
  • 15. make appropriate use of learning resources, including sophisticated computer datasets;
  • 16. develop their interpersonal skills and group working through the LinkedIn assignment (formative);
  • 17. show competence in debate and discussion through active class participation (formative);
  • 18. access empirical research literature and critically appraise it (formative).

Learning activities and teaching methods (given in hours of study time)

Scheduled Learning and Teaching ActivitiesGuided independent studyPlacement / study abroad
301200

Details of learning activities and teaching methods

CategoryHours of study timeDescription
Scheduled Learning & Teaching activities20Lectures
Scheduled Learning & Teaching activities10Tutorials
Guided Independent Study120Reading, preparation for classes and assessments

Formative assessment

Form of assessmentSize of the assessment (eg length / duration)ILOs assessedFeedback method
Individual Project2 weeks16-18Verbal and written
Weekly excel spreadsheetsWeekly1-15Verbal and written

Summative assessment (% of credit)

CourseworkWritten examsPractical exams
01000

Details of summative assessment

Form of assessment% of creditSize of the assessment (eg length / duration)ILOs assessedFeedback method
Online tests2040 minutes each. Best four results out of eight tests; 1-15Automatic pre-programmed feedback from VLE
Final Exam8060 minutes1-15Automatic pre-programmed feedback from VLE
If VLE test capability is not available, then 100% Online tests040 minutes each. Best five results out of ten tests, of which at least two results are from the last four tests and one result from the last two tests.Automatic pre-programmed feedback from VLE

Details of re-assessment (where required by referral or deferral)

Original form of assessmentForm of re-assessmentILOs re-assessedTimescale for re-assessment
Online tests (20%) & Final Exam (80%)Online test (1 hour) (100%)1-15August Reassessment Period

Re-assessment notes

If you fail the module overall, you will be re-assessed by way of an online written test that accounts for 100% weighting. The referred test will take place in the Summer reassessment period.

As this module doesn't require marks for all ten tests, students with approved mitigation deferring one or more tests but passing the module overall are not required but may choose to re-take tests.

Students who defer tests and want to re-take will be offered the following opportunities:

  • Tests 1-4: re-taken during Term 2 week 6 (specific days and times to be confirmed)
  • Tests 5*-10: re-taken after the end of the term (dates to be confirmed)

 

*the pattern of teaching means that it will not be appropriate or fair for students to re-take test 5; any student with approved mitigation wanting to re-take test 5 will instead take a re-test of test 6

Syllabus plan

This module covers two broad areas – derivatives and fixed income:

  • 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 the 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

Indicative learning resources - Basic reading

  1. CFA Program Curriculum 2020 Level I Volumes 1-6 Box Set. CFA Institute. 
  2. CFA Program Curriculum 2020 Level II Volumes 1-6 Box Set. CFA Institute. 

Module has an active ELE page?

Yes

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

https://www.theocc.com/ -- Options Clearing Corporation

Indicative learning resources - Other resources

http://lists.exeter.ac.uk/lists/04ED1553-9F08-9273-45ED-ED4849F8BB91.html

Origin date

14/07/2014

Last revision date

10/05/2021