37011 Financial Market Instruments
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Credit points: 8 cp
Subject level:
Postgraduate
Result type: Grade and marksRequisite(s): 24 credit points of completed study in spk(s): STM91543 Core Subjects (Mathematics)
These requisites may not apply to students in certain courses. See access conditions.
Anti-requisite(s): 25877 Financial Market Instruments
Description
Designed specifically for quantitative finance students, this subject imparts students with disciplinary knowledge in financial markets instruments by providing a rigorous introduction to the main financial instruments and markets that comprise the financial system. It also introduces pricing of financial instruments by using no-arbitrage arguments. It discusses the valuation of various financial securities such as equities and foreign exchange, bills and bonds, forward rates and yield curve calculations, forward rate agreements (FRAs) and interest rate swaps, as well as interest rate risk management. The subject also covers basics of option contracts, including definitions, strategies and valuation.
The subject provides students with a number of practical exercises involving implementation of the pricing models and techniques covered.
The combination of theory and practical, real-world examples and problems promote enquiry and critical thinking. Innovation and creativity are required to successfully solve problems in the assessment tasks, where communication is also critical to clearly explain solutions.
Subject learning objectives (SLOs)
Upon successful completion of this subject students should be able to:
| 1. | Understand the mechanics of the common financial market instruments and their applications in markets. In particular, students should have an in-depth knowledge of basic fixed income securities, forward and futures on equity, FX and interest rate, interest rate swaps and options |
|---|---|
| 2. | Apply the pricing formulae for these instruments under various scenarios. |
| 3. | Compute the risks associated with these instruments and apply techniques to manage these risks. |
| 4. | Construct various types yield curves from traded instruments. |
| 5. | Understand option contracts and devise option trading strategies. |
Course intended learning outcomes (CILOs)
This subject also contributes specifically to the development of following course intended learning outcomes:
- Appraise advanced knowledge and critically evaluate the information's source and relevance, with a focus on applications of mathematical methodologies to quantitative finance problem solving. (1.1)
- Investigate complex and challenging real-world problems in the areas of quantitative finance by critically evaluating information and solutions and conducting appropriate approaches to independent research. (2.1)
- Practice professionally adhering to confidentiality requirements, ethical conduct, data management, and organisation and collaborative skills in the context of applying mathematical and statistical modelling to quantitative finance problems. (3.1)
- Reflect and evaluate the value, integrity, and relevance of multiple sources of information to derive responsive, innovative solutions, show creativity, innovation and application of technologies in complex quantitative finance problems. (4.1)
- Develop and present complex ideas and justifications using appropriate communication approaches from a variety of methods (oral, written, visual) to communicate with mathematicians, data analysts, scientists, industry, and the general public. (5.1)
Contribution to the development of graduate attributes
This subject develops the essential concepts related to the use and pricing of fundamental financial market instruments at an advanced, quantitative level. The subject emphasises the practical applications and the importance of the various traded securities within the financial markets. Many of the concepts covered in this subject are further developed in later subjects in the degree.
The Faculty of Science has determined that our courses will aim to develop the following attributes in students at the completion of their course of study. Each subject will contribute to the development of these attributes in ways appropriate to the subject.
This subject contributes to the development of the following graduate attributes:
1. Disciplinary Knowledge - acquire detailed specialised quantitative finance knowledge and the professional competency required to work as a quantitative finance analyst in the modern finance industry.
2. Research, inquiry and critical thinking - develop the ability to apply and demonstrate critical and analytical skills to developing solution to complex real world problems.
3. Professional, Ethical and Social Responsibility - develop an enhanced capacity to work ethically and professionally using collaborative skills in the workplace.
4. Reflection, Innovation and Creativity – develop the ability source and analyse multiple sources of data to develop innovative solutions to real world problems in quantitative finance.
5. Communication - Effective professional communication skills for a range of technical and non-technical audiences.
Teaching and learning strategies
Lectures
This subject will use the ‘blended learning’ model where students will have access to online learning resources and will undertake learning tasks prior to coming to in-person workshops. Essential principles are presented and analysed in the online lecture component and this is complemented by students going through practical application exercises under the guidance of the lecturer in the workshops. In this way, the subject will enable students to experience an effective integration of online and face-to-face on-campus learning.
Computer Exercises
You will need access to a computer (running MS Windows, Linux or macOS), since solving computational problems in Python is an important part of this subject. In keeping with authentic assessment, some of these exercises will be conducted on real-world financial data. In order to provide early feedback, these exercises will be assigned in several parts over the teaching period and feedback will be provided on each completed part before the next part is due.
Workshops
Online recorded lectures in this subject will be complemented by in-person workshops. In these workshops, you will work in small groups to collaboratively solve mathematical problems in derivative security pricing on a whiteboard ("whiteboard tutorials"). The lecturer will provide formative feedback to each group as they develop their solutions during the workshops. Before each workshop, you should make sure that you have watched all recorded lectures and read all relevant material of the previous weeks.
Content (topics)
- Basics of equity markets.
- Fixed-income securities and bond portfolio management with applications.
- The measurement and hedging of interest rate risk.
- Forwards and futures; Valuation of forward contracts, cost of carry.
- FRAs and interest rate swaps. Swap rates; valuation of interest rate swaps
- Yield curve analysis: swap curve construction, forward rate curves, multiple curve construction. Workshop applications.
- The mechanics of options markets, option basics, put-call parity, option trading strategies. Introduction to option valuation. Implied volatility and volatility smiles.
Assessment
Assessment task 1: Assignments (Individual)
| Intent: | This assignments will contribute to the development of the following graduate attributes: 1. Disciplinary Knowledge 2. Research, enquiry and critical thinking 3. Professional, Ethical and Social Responsibility 4. Reflection, Innovation, Creativity 5. Communication |
|---|---|
| Objective(s): | This assessment task addresses subject learning objective(s): 1, 2, 3, 4 and 5 This assessment task contributes to the development of course intended learning outcome(s): 1.1, 2.1, 3.1, 4.1 and 5.1 |
| Groupwork: | Individual |
| Weight: | 50% |
| Criteria: | The assignments will be assessed accuracy of answers, workings and clear explanations of solutions. Both assignments will assess disciplinary knowledge and will encourage enquiry and critical thinking through the combination of theoretical and practical problems presented in the assignment. Both assignments will involve real-world financial problems which students will be required to solve in a professional and ethical manner. The problems assessed in the assignments will naturally require students to apply innovation and creativity to solve using appropriate software and applying concepts studied in the subject. Communication will also be critical to the successful completion of the assignments as students will need to write up explanations and justifications of their solutions in a clear and concise manner. |
Assessment task 2: Final Exam (Individual)
| Intent: | This final exam will contribute to the development of the following graduate attributes: 1. Disciplinary Knowledge 2. Research, enquiry and critical thinking. |
|---|---|
| Objective(s): | This assessment task addresses subject learning objective(s): 1, 2 and 3 This assessment task contributes to the development of course intended learning outcome(s): 1.1 and 2.1 |
| Groupwork: | Individual |
| Weight: | 50% |
| Criteria: | The final exam will assess disciplinary knowledge in terms of the integrity and correctness of the answers and the accuracy of explanations. Innovation, creativity and critical reflection in the answers to questions in the final exam are assessed and recognised. Critical thinking will be integral to successfully solving questions in the final exam. |
Minimum requirements
Students must achieve at least 50% of the subject’s total marks.
References
Kosowski, R. and Neftci, S., 2014, Principles of Financial Engineering, 3rd Edition, Elsevier
Hull, J. 2022, Futures, Options and Other Derivatives, 11th Edition., Pearson