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 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. This potentially opens 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 structuring in the areas of fixed income and derivatives. This module will be useful to prepare the student for both the profession of Derivatives Trader and the hedging responsibility of 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 future 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 evaluate critically 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 important 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
- 8. Describe the mechanisms of several advanced instruments such as bonds with embedded options, credit default swaps and asset-backed securities.
ILO: Discipline-specific skills
- 8. Improve their knowledge of mathematical finance and apply computational methods in pricing option, derivative 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 participation in class. (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||20||Lectures|
|Scheduled learning and teaching activities||10||Tutorials|
|Guided independent study||120||Reading, 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 & written|
|Weekly Excel Spreadsheets||Weekly||1-15||Verbal & 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|
|Online tests||100||40 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.||1-15||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|
|Online tests||Online test (1 hour)||1-15||August|
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. There is no refer/defer opportunity for the individual tests during the term.
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 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
- 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