Credit Instruments and Derivatives

Module description

Summary:

This module is available on the Financial Analysis and Fund Management programme, and 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 about 100 countries and hundreds of banks across the globe. Also, many of the examples discussed throughout the module are based on American, European and Asian markets.

External Engagement

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

Employability

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 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)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

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

Re-assessment notes

If you fail the online written examination, you will be advised of this and will be allowed to sit the referred examination once. The referred examination will take place in August in a computer room on campus. There is no resit opportunity for the mid-term exam. If you fail the module overall, then you will be re-assessed 100% via the online written exam.  

Syllabus plan

1. Forward Markets and Contracts
2. Futures Markets and Contracts
3. Option Markets and Contracts
4. Swap Markets and Contracts
5. Interest Rate Derivative Instruments
6.  Using credit derivatives to enhance return and manage risk via CDS (Credit Default Swaps)
7. Valuing Bonds with Embedded Options
8.  Mortgage-Backed Sector of the Bond Market

If time permits:

10.  Solving the Liquidity Conundrum

11. Ethical Use of Derivatives and Fixed Income Instruments: Nassim Taleb and Daniel Kahneman: Reflection on a Crisis

This module is centred on the valuations techniques, not financial derivatives and fixed income instruments. The topics highlighted in bold above contain new valuation techniques and will be focused on for more than a week. For the lectures when the valuation techniques are known, will be covering two lectures per week. (Please note that more than one topic may be covered in each lecture). 

Indicative learning resources - Basic reading

Core Texts:

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 Portfolio 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

Etheridge, Alison, 2002, A Course in Financial Calculus

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

05/01/2018