Bond Market Pricing and Trading Strategies
Module convenor: Dr Andy Bevan20 credits
The main aims of the module are to identify the fundamental determinants of short- and long-term interest rates, learn how to monitor developments in interest rate markets and employ commonly used trading strategies. The course will be based around the work of a research department in an investment bank when formulating strategy for its proprietary trading desk and hedge fund customers. Each lecture will provide: (1) a concise outline of economic theory, (2) practical examples of events in markets from recent years, and (3) identification of trading strategies. Seminars will focus on market pricing conventions and worked examples.
By the end of the module it is expected that students will:
- Be aware of the main aspects of the economic theories of the determination of interest rates and corporate credit spreads
- Be capable of analyzing economic situations to determine the likely implication for various assets in the interest rate markets
- Be familiar with the principal strategies used in trading short rates, long rates and credit spreads
Outline content
- Flow of Funds and the Economics of Interest Rates
- Monitoring Central Banks and the Determination of Short Rates
- Pricing and Trading of Short Rate Instruments
- Fundamentals of Bond Pricing, Duration and Convexity
- Fitting the Yield Curve and Theories of the Term Structure
- Trading of Bonds, Bond Forwards and Futures
- Pricing and Trading of Interest Rate Swaps
- Default Risk and Corporate Bond Spreads
- Corporate Bond Spreads Through the Business Cycle
- Pricing and Trading of Credit Default Swaps
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Commodity Derivatives
Module convenor: Dr Konstantina Kappou10 credits
This module aims to provide students with a detailed knowledge of the Commodity Derivatives Markets. It examines the aspects of pricing and trading physical derivatives, with emphasis on the Energy and Shipping (Freight) sectors. The course is designed using real trading examples, stimulating students, who want to follow a Sales and Trading Career in Investment Banking, to approach derivatives pricing from first principles.
Outline: Introduction to Commodity Markets (History and Evolution, Energy Products, Base Metals, Soft Commodities), Main Market Players and the Forward Curve (Basis Risk, Commodity Futures and Options, Exchanges and OTC markets), Pricing of Commodity Derivatives (Swaps, Options and Structured Trades), The Oil Market and its Mechanisms (OPEC and DOE, Crude Supply and Demand, Inventories, Crude Products and Crack Spreads, Refineries and Margins, Main Energy Derivatives strategies), The Freight Market and its Mechanisms (The Baltic Exchange and the Shipping Industry, Forward Freight Agreements, Trading Freight Derivatives)
Available learning modes:
Corporate Financial Management
Module convenor: Dr Carol Padgett10 credits
Corporate financial management deals with the long-term financial decisions that corporations make and the tools and analysis used to make these decisions. The objective of the module is to introduce students to the main financial decisions taken by corporations, examining how those decisions influence the market's valuation of companies.
Outline: The corporate form and initial public offerings, Valuation: management and measurement of value, Capital budgeting: decisions on fixed assets, Treasury function 1: working capital management and risk management, Treasury function 2: new issues, Treasury function 3: capital structure continued, Dividend policy: dividends and share repurchases.
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Derivatives Securities: Pricing, Hedging and Trading
Module convenor: Dr Michael Smith20 credits
The module objective is to give students a practical working knowledge of the pricing, hedging and trading of derivative securities, in particular options, via the use of trading simulations and pricing case studies/software. The emphasis of the module is on practical application and it is expected that by the end of the module students will understand and be able to analyse the time/risk dynamics of derivatives in a trading environment.
By the end of the module, it is expected that the student will be able to
- Explain the underlying principles of option pricing models and thereby price options
- Analyse the fundamental risk exposures associated with any derivatives portfolio
- Interpret the different volatilities associated with options and implement successful volatility trading strategies
- Understand and be able to implement hedging strategies in the face of changing market conditions
Outline content
- Option Pricing
- Option Price Sensitivities: Risks and Trading Applications
- Volatility
- Volatility Smiles
- Trading Strategies
- Currency Options
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Empirical Market Microstructure
Module convenor: Dr Alfonso Dufour10 credits
In the trading industry there is an increasing awareness of the importance of transaction costs and liquidity risk management. However, transaction costs and liquidity risk can be appropriately managed only if they can be measured. The objective of this course is to give students an introduction to state-of-the-art econometric techniques for analysing trade data, measuring transaction costs and market liquidity and evaluating market fragmentation.
Available learning modes:
Essentials of Financial Engineering
Module convenor: Dr Marcel Prokopczuk10 credits
The module provides an introduction to the basic techniques employed in Financial Engineering. Students will understand how these methods can be applied to design securities with desired payoff characteristics. They will be able to evaluate complex securities by means of reverse engineering and be aware of possible problems when these methods are applied in real world situations.
Outline content: Introduction to Financial Engineering, cash flow engineering, basic financial products, interest and forward rates, no-arbitrage and the law of one price; Pricing and hedging by replication, major interest rate (IR) swap structures, IR swaps, currency forwards and cross currencies FX-swaps, options; Structured products, introduction and evaluation; Dynamic strategies for hedging and principal protection; Credit markets: CDS engineering, credit indices and CDO's.
Financial Econometrics
Module convenor: Dr Alfonso Dufour20 credits
Building on the material introduced in Quantitative Methods for Finance, this module examines a number of additional techniques that are relevant for financial applications, and in particular for modelling and forecasting financial time series. An introduction to the methods of maximum likelihood estimation and Generalised Method of Moments will be given, and emphasis will be placed on modelling high-frequency data. Case studies from the academic finance literature are employed to demonstrate potential uses of each approach. Extensive use is also made of financial econometrics software to demonstrate how the techniques are applied in practice.
By the end of the module, it is expected that the student will be able to
- Describe, estimate and evaluate a number of different approaches for modeling financial data with particular emphasis on trade data
- Determine the appropriate class of models to address a particular problem in empirical finance
- Compare and contrast a number of methods for modeling and forecasting the volatility of financial time series
- Write programs in a statistical software package in order to achieve particular tasks that cannot be accomplished using built-in functions
- Comprehend and critically evaluate the use of econometrics in the published academic finance literature
Outline content
- Stylised characteristics of financial data
- Ordinary Least Squares (OLS)
- Relaxing the OLS assumptions
- Simultaneous equations models
- Vector autoregressive models
- Cointegration
- Maximum Likelihood estimation method
- Panel data analysis
- Simulations methods in econometrics and finance
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Foreign Exchange and Money Markets
Module convenor: Dr Michael Smith20 credits
The basic aim of this module is to equip students with a firm understanding of the overall function, structure and operation of the FX and short-term interest rate markets. This will not only provide the technical knowledge required to trade in and manage the risk in those markets, but will also introduce and illustrate a number of key practical issues relevant to all financial activity, such as balance sheet constraints, risk capital, liquidity and funding issues, and concepts such as the nature of derivatives, OTC markets and MTFs, regulatory arbitrage, netting, fair v market value, basis risk. It aims to demonstrate that there is a small body of arithmetic that applies across the board to all instruments.
The Learning Outcomes of this module are:
- To define the economic function of the FX and money markets.
- To describe, compare and contrast cash and derivative FX and money market instruments in terms of their structure, operation, application, type of user and risk/return characteristics.
- To apply a common body of financial arithmetic to the pricing and valuation of all cash and derivative FX and money market instruments.
- To demonstrate how instruments can be use to take risk outright or in spread/basis trades against other instruments, to hedge or synthesise each other, and to exploit arbitrage opportunities.
- To demonstrate the economic relationship between cash and derivative FX and money market instruments
Outline content
- The functions of the money market with basic trading strategies.
- Common concepts and consistent application of money market arithmetic.
- Traditional cash instruments: deposits, Treasury bills, CP, CD, repo. Key rates: LIBOR/EURIBOR, EONIA/etc.
- Interest rate risk in the money market. Cash rates, forward rates and the forward curve
- Money market derivatives: FRA. The mechanics of FRAs: early payment and discounting of the settlement amount
- Money market derivatives: money market futures. Market structure and contract specification. Using futures to take outright and spread risk. Using futures to hedge: the problem of basis risk.
- Money market derivatives: interest rate swaps. Mechanics. OIS.
- Exchange rate conventions. The FX market. Forward FX: pricing, hedging. FX swaps.
Available learning modes:
Hedging
Module convenor: Dr Jacques Pezier20 credits
This course is designed for students seeking a career in ?front office? risk management whether in banks, fund management or corporate treasury. Hedging is financial risk management in action; it is often cited as the raison d?etre of derivatives markets - trading and arbitrage playing the supporting roles of providing liquidity and keeping prices fair and thus facilitating hedging. Corporates can reduce uncertainty by hedging away financial risks that fall beyond their areas of competence; fund managers can design hedge strategies that provide risk/reward profiles tailored to their clients; but it is in banking, which core activity is financial risk management, that efficient hedging makes the difference between success and failure.
This course examines the rationale for hedging and the methods for doing it efficiently in a variety of circumstances. We review the wide range of market risks (currency, interest rate, equity and commodity) and credit risks for which there is a growing derivatives market. Particular attention is given to the thorny issue of optimal dynamic hedging with transaction costs.
A basic understanding of stochastic processes and risk analysis methods is indispensable to address these issues as well as a basic knowledge of financial instruments and trading mechanisms. Only students with good quantitative skills and a basic knowledge of derivative products should take this course.
Outline Content
- Financial risks and hedging principles
- Market Risk: Static Hedging
- Hedging with forwards, futures and swaps
- Dynamic delta hedging; risk attitude
- Gamma and volatility hedging; portfolio insurance
- Credit Risks: Credit derivatives and other credit risk mitigants
- Multifactor hedging: Forex and interest rate risks
- Hedge accounting; regulatory and economic capital
- Performance measures and risk aggregation in firms
- Hedging programmes and case studies
Available learning modes:
International Securities Markets
Module convenor: John Evans10 credits
International Securities Markets applies general valuation risk assessment methods to: fixed income securities, derivatives and markets. It describes the basic characteristics of each fixed-income security, cash and underlying, and develops practical strategies for finding its value and assessing its risk. It also considers how the markets for these securities are related and begins the task of showing how these relationships can be exploited for trading or investment.
The analytical techniques introduced in this module are very applied to allow the successful candidate to apply directly to industry the more theoretical market valuation and risk models learned in other core modules taken in the first term.
Outline: FIxed income Analysis, Rates Trading and Hedging I, Rates Trading and Hedging II, Credit Analysis and Products I, Credit Analysis and Products II
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Liquidity Risk
Module convenor: Dr Alfonso Dufour10 credits
The evolution of algorithmic trading, the proliferation of alternative trading platforms for trading the same security and the development of new products and assets with limited liquidity have contributed to raising the awareness of academics and traders on the importance of understanding and properly managing liquidity and execution risks. The objective of this course is to give students an introduction to liquidity and execution risks and an overview of the methods for managing these risks. The issues discussed in this course are important when developing trading strategies, valuing portfolios, liquidating large positions and transitioning assets to new investments.
By the end of the module, it is expected that the student will be able to
- Explain the concepts of high frequency trading and algorithmic trading.
- Identify the characteristic elements of alternative algorithmic trade execution strategies
- Explain how to measure and manage trade execution risk and compute liquidity adjusted VaRs
- Solve simple trade execution problems and develop optimal execution strategies
- Understand the impact of recent regulatory changes on the market and market players
Outline content
- Introduction to the Security trading industry. Algorithmic Trading. Liquidity and liquidity risk. Liquidity suppliers.
- An example of algorithmic execution strategy: VWAP
- Transaction Cost Analysis (TCA). A framework for measuring and managing trade execution costs.
- Optimal execution strategies and liquidity adjusted value at risk of asset holdings
- Understanding, modeling and predicting execution risk
- MiFID and Reg-NMS. Recent regulatory trends and expected impacts on markets (competition, transparency and best execution)
Available learning modes:
Managing Securities Operations
Module convenor: TBC10 credits
Managing Securities Operations is learning about and applying the concept of Operations Management to a financial institution. The course combines teaching about both the technical aspects of securities operations management and theoretical aspects of managing the risks inherent in such as business. It also serves as a base for those interested in further study in operational risk management. The analytics techniques taught in this course serve to synthesise much of the material being taught in the first term core topics of products, markets and institutions by learning how to apply them with regard to management theory.
By the end of the module, the student will be able to: Understand how the various securities and derivatives taught in first term courses are traded and operationally managed in a financial institution; they will be introduced to Operations Management theory and how it is applied in a financial institution; they will learn and understand about the many operational market intermediaries that are essential for the investment and trading of securities; they will learn to create and manage securities databases; they will reinforce their knowledge about securities pricing and the various legal and market practices that impact settlement prices; they will understand the full “life cycle of a trade” and how it is managed at a senior management level. They will be introduced to the many and varied new regulatory frameworks being incorporated into the market (Basle II, etc.).
Outline content
- Essential operational management concepts
- The operational structure of a securities trading organisation
- The many types of securities transactions
- Understanding the trade life cycle - post trade
- Understanding the trade life cycles - funding
- Operational risks and how to manage them.
Available learning modes:
Market Risk
Module convenor: Dr Emese Lazar20 credits
This module provides an understanding of the Value-at-Risk (VaR) framework for market risk assessment and control. The module has a significant practical component with computer-based workshops that are designed to support the lecture material.
By the end of the module, it is expected that students will:
- Understand the latest developments in banking regulations that are the main driving force behind changes in our approaches to risk measurement
- Outline the foundations of market risk analysis and the basic models for assessing market risk
- Describe the market risk measurement techniques that are used daily in the front and middle offices of banks; particular emphasis is placed on the appraisal of the covariance matrices that are used to measure the market risk of portfolios
- Be able to build various Value-at-Risk (VaR) models for market risk for international portfolios of equities, FX, interest rate products, commodities, derivatives etc.
Outline content
- The characteristics of markets and market risk
- Capital requirements & RAPM
- Value at Risk models
- Advanced VaR models
- Applications to Equities
- Applications to Foreign exchange
- Applications to Interest rate products
- Applications to Derivatives
- Applications to Fund management, banking & non-financial firms
Available learning modes:
- Full time
- Flexible learning
- Distance learning
New Approaches to International and European Financial Market Regulation
Module convenor: Miss Deepa Govindarajan10 credits
We will challenge current and past thinking on regulatory structures and concepts especially in the context of the recent financial crisis, which provides us with a rich source of information on the pros and cons of various options. One of the key aims to provide students with the broader risk management skills and knowledge required to work within the financial services industry. We will also aim to gain an understanding of the role and working of risk management, compliance, internal audit and allied functions in financial firms.
Outline content
- Regulatory context- the crisis
- Regulatory Objectives - What are we trying to legislate for
- Regulating risk - Prudential and conduct of business issues.
- Governance and Culture
- Systems and Controls
- Compliance, risk management, audit and finance - roles and responsibilities
- Can regulators rely on these functions - how to test their efficacy
- Regulatory Architecture
- International regulatory architecture
- European regulatory architecture
- UK regulatory structures
- Regulation today, key areas of legislation and regulatory tools
- Basel 2
- Basel 3
- Solvency 2
- UCITS
- MiFID
- Regulatory tools
Available learning modes:
- Full time
- Flexible learning
- Distance learning
The Principles of Islamic Commercial Jurisprudence and the Nominate Contracts
Module convenor: INCEIF Faculty10 credits
Provides students with the opportunity to study the juristic basis of Islamic finance, and the nominate contracts that are set out in Islamic commercial jurisprudence (the Fiqh al Muamalat). Students will develop an understanding of the principles of Islamic jurisprudence and its nominate contracts, and how these are applied in Shari’ah compliant financial products and services.
Outline Content
- The origins of Islamic commercial jurisprudence
- Prohibitions to be respected in order for Islamic contracts to be valid:
- Avoidance of riba (pure return on money), maysir (speculation), and gharar (uncertainty or ambiguity of subject      matter)
- The frequently used nominate contracts
- Overview of Islamic financial products and their basis in nominate contracts (see Module 255)
- ShariÂ’ah governance of Islamic financial institutions
- The IFSB Guidelines on ShariÂ’ah governance
Real Estate Finance
Module convenor: Dr Gianluca Marcato10 credits
The module will enable students to interpret the main principles of corporate finance with an appropriate emphasis on real estate. It will also allow students to recognise the strategic importance of real estate to corporate financial decision making.
By the end of the module it is expected that students will be able to:
- Develop skills in the estimation and evaluation of alternative approaches to capital budgeting decisions;
- Critically compare and contrast alternative methods of financing core projects;
- Understand the importance of real estate to corporate strategic financial decisions;
- Value real options and understand how they can be applied in a real estate context.
Outline content
- The reporting of real estate in company accounts
- Performance of real estate companies assessed through accounting numbers and ratios
- Comparison of valuation methods used in finance and in property
- Traditional methods of property appraisal and development
- Review of Capital Budgeting techniques applicable to real estate investment and development applications
- Principles underlying decisions about capital structure, debt and equity financing, Project vs. company funding, application to real estate lease or buy decision (financial and accounting issues)
- Real estate financial decisions with applications of real options
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Research Project
Module convenor: Professor Charles Sutcliffe20 credits
The aim of the research project is to allow students to define and execute a piece of research in finance on a topic of their choice, with direction from an academic supervisor and with assistance from a doctoral student support supervisor.
The Learning Outcomes of this module are:
- Successful completion of the research project requires students to define and execute a piece of research in finance.
- They will be required to seek out and to critically evaluate published literature in a particular field.
- Students will improve their report-writing skills, learning how to structure their study, and how to place their findings in the wider context
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Stock Index Futures
Module convenor: Professor Charles Sutcliffe10 credits
This module covers the construction of stock market indices, how futures are traded, pricing futures from an arbitrage relationship, how futures can be used for hedging the price risk of the underlying, and the various uses that fund managers make of these derivative instruments.
By the end of the module it is expected that students will be aware of the different ways of constructing stock market indices and the implications of these differences, how futures contracts are traded and the identity of some of the close substitutes for trading index futures, how futures can be priced using an arbitrage relationship, how futures can be used for hedging the price risk of the underlying, and the various uses that fund managers make of these instruments.
Outline content
- Introduction to Trading Stock Index Futures
- Arbitrage and the Valuation of Stock Index Futures
- The Basis and Spread Trading of Stock Index Futures
- Hedging Using Stock Index Futures
- The Uses of Stock Index Futures by Fund Managers
Available learning modes:
Topics in Financial Engineering
Module convenor: Dr Jacques Pezier10 credits
Designed for future quants and financial engineers to introduce them to the main types of problems they will be asked to solve and to make them aware of the range of issues they will have to consider. Financial engineering is the art of designing and implementing innovative solutions to financial problems. This course explores a number of typical problems faced by both financial and non-financial institutions for which a range of solutions, often using derivative products, is possible. In each case we examine the feasibility and relative advantages and disadvantages of alternative solutions, taking into account legal, accounting, tax and regulatory matters as well as risks and returns.
Outline content
- Facilitation of acquisition and disposal of shares, preparation for mergers - Equity swaps, CVRs and quantity options
- Tax efficient structures and strategies - Long term investment products, tax efficient financing, executive incentive schemes
- Creation of cheap Tier 1 and upper Tier 2 capital for banks - Convertibles and other hybrids; Market risk management - Index linked structured products, overlay strategies, dynamic control strategies
- Credit risk management - credit risk protected loans, CDSs and securitization.
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Topics in the History of Finance
Module convenor: Professor Adrian Bell10 credits
This module aims to provide students with an understanding of the origins of Financial Markets, and with a broader appreciation of the early development of products and innovations in Finance - which many assume are recent twentieth century inventions.
By the end of the module it is expected that the student will be able to:
- Identify and explain key issues and events in the History of Finance
- Acquire a detailed knowledge of the events through extensive reading in specialised literature
- Locate and assemble information on the subject by independent research
- Appraise critically the primary sources and historical interpretations of the subject
- Organise material and articulate arguments effectively in writing, both under timed conditions and in assessed essays.
Outline content
The module will focus on topics that can throw light on the development of financial markets over time. It is not restricted by date, but will draw mainly upon Medieval Europe for its focus. Topics will include:
- Forward Contracts for the supply of Wool in the 13th Century
- Early Italian Merchant Banks - Riccardi, Bardi
- The English Company of 1339
- The South Sea Bubble - John Law
- War Finance
- Tulip Mania
Available learning modes:
Trading and Exchanges
Module convenor: Dr Alfonso Dufour20 credits
Provides students with an overview of exchanges and trading mechanisms and an introduction to modelling market player behaviour and trade price dynamics. This course helps the student understand how security markets work and how they are regulated. The focus is on the understanding of market performance key factors such as efficiency, transparency and liquidity. Students are provided with a framework for comparing and contrasting existing market structures; then students learn how market makers set spreads and quotes.
Available learning modes:
- Flexible learning
- Distance learning
Volatility Analysis
Module convenor: Professor Carol Alexander20 credits
Provides an in depth understanding of the different approaches to modelling financial market volatility in discrete and continuous time. The module will focus on GARCH statistical models and the local and stochastic volatility models that are now in standard use by leading industry practitioners, and which have been the subject of extensive academic research. It is has a high quantitative content and a significant practical component with computer-based workshops (face-to-face and distance) designed to support the material.
Outline content
- Statistical models of Volatility and Correlation
- Normal mixture models
- Normal and normal mixture GARCH
- Principal Component Analysis: Applications to building covariance matrices
- Modelling Implied Volatilities and their dynamics
- Local Volatility models
- Stochastic Volatility Models
- Hedging
Available learning modes:
- Full time
- Flexible learning
- Distance learning
Integral to the academic course is the parallel study of the Chartered Financial Analyst® (CFA® ) programme, level 1. The two programmes support and reinforce the other, ensuring that graduates acquire both the academic and professional knowledge and qualifications required to succeed in the investment management industry. The tuition for this programme includes the candidate’s registration in the June CFA Level I exam that is written just after the end of the academic year (no other sitting is supported). The tuition also includes substantial CFA teaching outside of the academic teaching.
