Credit Instruments and Derivatives
This module aims to equip the students with the essential quantitative tools to evaluate and risk-analyse financial derivatives and fixed income securities. Topics include no-arbitrage valuation, overview of prevalent fixed income and derivatives products, binomial option pricing model, Black-Scholes model, valuation and risk analysis of bonds, term structure of interest rates, credit instruments and other advanced products.
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.
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.
The Chartered Financial Analyst Institute (CFA) accredits this module, and all of the content is based on the CFA level examination.
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.
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: |
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 Modell;
- 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 Activities||Guided independent study||Placement / study abroad|
Details of learning activities and teaching methods
|Category||Hours of study time||Description|
|Scheduled learning and teaching activities||12||Two-hour Q&A sessions (in week 1, 3, 5, 7, 9 & 11)|
|Scheduled learning and teaching activities||10||Tutorials (in weeks 1, 2, 3, 4, 5, 7, 8, 9 10 & 11)|
|Guided independent study||128||Reading prepared lectures in PDF, watching pre-recorded videos, solving problems in Excel, preparation for classes and assessments|
|Form of assessment||Size of the assessment (eg length / duration)||ILOs assessed||Feedback method|
|Individual Project||2 weeks||16-18||Verbal|
|Weekly Excel Spreadsheets||1-3 hours||1-15||Verbal|
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|
|10 Weekly quizzes (best five results)||10||40 minutes each||15||Verbal during Q&A sessions & automatic pre-programmed feedback from VLE|
|Final Exam||90||60 minutes||1-15||automatic pre-programmed feedback from VLE|
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|
|Final exam (100%) (60 minutes)||10 Weekly quizzes + Final exam (10%+90%) (60 minutes)||1-15||August Reassessment Period|
Students who fail the module overall or defer the final exam owing to mitigating circumstances will be re-assessed with a final exam during the August re-assessment period.
Students who miss a weekly quiz without legitimate reasons will be awarded a mark of zero for that quiz. Students who miss a weekly quiz with legitimate reasons will have that quiz set aside, with the students’ overall quiz results computed using the best five out of the remaining quizzes that the students take.
In the very unlikely event that a student is ill or affected by personal circumstances that potentially preclude them from undertaking five or more weekly quizzes, the student’s overall quiz result will be computed using a combination of the student’s weekly quiz results and proxy marks based on the student’s final exam. For example, if a student only manages to complete two weekly quizzes, their overall quiz result will be the average of the results of the two quizzes that they took and three proxy marks. The proxy marks used will be the student’s final exam result.
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
• Solving the Liquidity Conundrum
If time permits:
• Ethical Use of Derivatives and Fixed Income Instruments: Nassim Taleb and Daniel Kahneman: Reflection on a Crisis
Indicative learning resources - Basic reading
- CFA Program Curriculum 2020 Level I Volumes 1-6 Box Set. CFA Institute.
- CFA Program Curriculum 2020 Level II Volumes 1-6 Box Set. CFA Institute.
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
www.theocc.com -- Options Clearing Corporation
Indicative learning resources - Other resources
Last revision date