Credit Instruments and Derivatives
This module is available on the Financial Analysis and Fund Management programme, 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:||Credit Instruments and Derivatives|
|Duration of module:||
Duration (weeks) - term 2: |
This module aims 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 on 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 analyze 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 numerical methods to price derivatives in the equities, currency rate, fixed income and other market. The module will also introduce various interest rate options and 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 theoretical and technical points.
The module is organized around valuation techniques and not around derivatives and fixed income instruments. The pace of the module is designed for the students to understand the different valuation techniques and the derivatives and fixed income instruments are used as example. Therefore, we take in the beginning several weeks to cover a single instrument (chapter) and at the end we cover several instruments (chapters) per week.
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. understand the forms of basic derivative contracts and important hedging strategies
- 3. understand the theoretical analysis of binomial trees and the Black and Scholes model, and its relationship to the Binomial Option Pricing Model
- 4. price financial options using both analytical and numerical techniques
- 5. 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
- 6. advance their knowledge of mathematical finance and learn the application of computational methods in pricing option products
- 7. develop rigorous theoretical arguments based on mathematical and analytical reasoning
- 8. rigorously to analyze problems in finance, especially derivatives and fixed income pricing
- 9. interpret financial data and problems in the light of established theories
- 10. access empirical research literature and critically appraise it
- 11. 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
- 12. develop their interpersonal skills and group working through the LinkedIn assignment
- 13. show confidence in debate and discussion through active participation in class
- 14. develop computing skills throughout this module
- 15. plan and manage his/her own study
- 16. make appropriate use of learning resources, including sophisticated computer datasets
- 17. analyze critically problems arising in both academic and practical contexts
- 18. present 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 - best 5 to count 2% each||10||20 to 50 minutes||1-11 & 15-17||ELE Module Feedback|
|Written Examination||89||1-2 hours||1-11 & 15-17||ELE Module 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|
|As Above||Written Examination (100%) 1-2 hours||1-11 &15-17||August Examination Period|
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
- General Principles of Credit Analysis
- Solving the Liquidity Conundrum
- Term Structure and Volatility of Interest Rates
- 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
- Asset-Backed Sector of the Bond Market
- Valuing Mortgage-Backed and Asset-Backed Securities
- Ethical Use of Derivatives and Fixed Income Instruments: Nassim Taleb and Daniel Kahneman: Reflection on a Crisis
Students will be assigned to a group which will commence from week one.
On the first week the LinkedIn assignment will be discussed. On all consecutive weeks there will be 40 minute VLE test. (http://vle.exeter.ac.uk) The test will have 10 to 15 computational problems based on the excel spreadsheets assigned from the material learned the previous week as well as all weeks preceding. The test may also have multiple choice questions based on the material discussed in class and on the Power Point presentations given to the students.
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 Portolio 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
- Alison Etheridge, (2002), A Course in Financial Calculus
Module has an active ELE page?
Indicative learning resources - Web based and electronic resources
Indicative learning resources - Other 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
Last revision date