Credit Instruments and Derivatives

Module description

Summary:

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.

Additional Information:

Internationalization

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.

External Engagement

This module is accredited by the Chartered Financial Analyst Institute (CFA) and all of the content is based on the CFA examination.

Employability

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.

Sustainability

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

Full module specification

Module title:Credit Instruments and Derivatives
Module code:BEFM017
Module level:M
Academic year:2016/7
Module lecturers:
  • Dr Stanley Gyoshev - Lecturer
Module credit:15
ECTS value:

7.5

Pre-requisites:

None

Co-requisites:

None

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

11

Module aims

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 learn the application of computational methods in pricing option 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 confidence 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. present effectively results and achievements of individual projects

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

Scheduled Learning and Teaching ActivitiesGuided independent studyPlacement / study abroad
411090

Details of learning activities and teaching methods

CategoryHours of study timeDescription
Contact Hours22Lectures
11Tutorials*

Summative assessment (% of credit)

CourseworkWritten examsPractical exams
11890

Details of summative assessment

Form of assessment% of creditSize of the assessment (eg length / duration)ILOs assessedFeedback method
Individual Project112 &14-18Lecture Discussion
7 or 10 tests - best 5 to count 2% each 1020 to 50 minutes1-11 & 15-17ELE Module Feedback
Written Examination891-2 hours1-11 & 15-17ELE Module Feedback
0
0
0
0

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

Original form of assessmentForm of re-assessmentILOs re-assessedTimescale for re-assessment
As AboveWritten Examination (100%) 1-2 hours1-11 &15-17August Examination Period

Re-assessment notes

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.

Syllabus plan

  • 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

Core Texts:

  1. Don M. Chance, 2003, Analysis of Derivatives for the CFA® Program. 6th ed. Charlottesville, Virginia 22903: AIMR
  2. Frank J. Fabozzi, 2005, Fixed Income Analysis for the CFA® Program. 2nd ed. Charlottesville, Virginia 22903: AIMR

Useful additional texts are:

  1. Hull, J., 2000, Options, Futures and other derivatives, 3rd ed. London. Prentice Hall
  2. Kolb, R.W., 2002, Futures, Options, & Swaps, Blackwell
  3. Chance, D., 1997, Introduction to Derivatives, Thomson Learning
  4. Wilmott, P., 2001, Paul Wilmott Introduces Quantitative Finance, 2nd edition, John Wiley
  5. Wilmott, P., S. Howison and J. Dewynne, 1995, The Mathematics of Financial Derivatives: a Student Introduction, Cambridge University Press
  6. Clewlow, L. and C. Strickland, 1998, Implementing derivative models, John Wiley
  7. Haug , Espen Gaarder, 2007, Derivatives: Models on Models, John Wiley & Sons
  8. Taleb , Nassim Nicholas, 1997, Taleb on Risk: Dynamic Hedging, John Wiley & Sons
  9. Taleb , Nassim Nicholas, 2001, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Penguin
  10. Taleb , Nassim Nicholas, 2007, The Black Swan: The Impact of the Highly Improbable, John Wiley & Sons
  11. Das, Satyajit, 2006, Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives, Financial Times/ Prentice Hall
  12. Partnoy, Frank, 1998, FIASCO: Blood In the Water on Wall Street: Guns, Booze and Bloodlust - The Truth About High Finance, Profile Business
  13. Osband, Kent, 2001, Iceberg Risk: An Adventure in Portfolio Theory: An Adventure in Portfolio Theory, Texere Publishing, US
  14. Lowenstein, Roger, 2002,  When Genius Failed: The Rise and Fall of Long Term Capital Management, Fourth Estate
  15. Bernstein, Peter L., 1998,  Against the Gods: The Remarkable Story of Risk, John Wiley & Sons
  16. Ross, Sheldon M., 2002, An Elementary Introduction to Mathematical Finance
  17. Alison Etheridge, 2002, A Course in Financial Calculus
  18. Jacque, Laurent, 2010, Global derivative debacles: from theory to malpractice

Module has an active ELE page?

Yes

Indicative learning resources - Web based and electronic resources

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

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

Origin date

17/07/2014

Last revision date

20/01/2017