MSc Investment Management
Programme Content Part 2

Part 2 - Compulsory Modules:

  • Current Issues in Investment Management
  • Enterprise Valuation
  • Ethics in Investment Management
  • Portfolio Management

Plus a choice of 40 credits from the optional modules below:

Part 2 - Optional Modules:

  • Advanced Methods for Financial Research*
  • Bond Market Pricing and Trading Strategies*
  • Commodity Derivatives
  • Derivatives Securities: Pricing, Hedging and Trading
  • Financial Econometrics
  • Financial Regulation and Regulatory Policy
  • Foreign Exchange and Money Markets*
  • Hedging*
  • International Securities Markets
  • Liquidity Risk*
  • Market Risk
  • Principles of Financial Engineering
  • Real Estate Finance
  • Research Project
  • Stock Index Futures
  • Theory and Ethics in Islamic Economics and Finance
  • Topics in the History of Finance*
  • Volatility Analysis

* Please note that at this time those modules with asterisks against them are not available on a distance learning basis.

Part 2 - Compulsory Modules:

Current Issues in Investment Management

Convenor: John Evans
Credits: 20

Aims:

Current Issues in Investment Management is an applied debate on the issues and trends affecting the investment management industry and as such the topics may vary and/or be updated on a year-to-year basis. The purpose is to give the student a clear overview on industry structure and the forces of change - something that has been identified as a key information need by investment management firms in regard to their future management hires.

Although stand alone topics, they will be integrated by usage of an industry model for competition such as that advanced by Michael Porter to show the interaction between the various financial players, underlying trends in demographics and government regulation.

Outline Content:

Topic 1    Overview of financial intermediation at both an institutional and retail level. Demographic trends and changes in public policy and regulation.
Topic 2    Analysis of pension fund sponsors and their managers. The role of investment consultants.
Topic 3    The role of investment management in the insurance industry, both life and casualty.
Topic 4    Use of behavioural finance in investment strategy.
Topic 5    Global Custody - operations management in funds.
Topic 6    International investing and currency overlay.
Topic 7    Investing in Real Estate
Topic 8    Investing in Commodities
Topic 9    Regulation of the IM industry - a European focus
Topic 10  Alternative Investment Strategies
Topic 11  Investment Management Game (seminar)

*N.B.  Topic order may change given the schedule of the various guest speakers. 

Enterprise Valuation

Convenor: Carol Padgett
Credits: 10

Aims:

Introduces techniques which can be used to measure corporate performance and/or value companies. Examines the calculation and explanation of a a variety of performance measures, the valuation of companies based on projected cash flows and how information asymmetrics affect valuation.

Outline Content:

  • Interpreting financial statements
  • Economic profit
  • Free cash flow
  • Capital structure: vital decision or window dressing?
  • The weighted average cost of capital
  • Dividend policy and valuation

Ethics in Investment Management

Convenor: Carol Padgett
Credits: 10

Aim 

To introduce students to the ethical difficulties encountered by investment professionals as they invest other people's money.

Intended learning outcomes:

Assessable outcomes
By the end of the course students will appreciate the ethical standards imposed by professional bodies and financial regulators. They will be able to identify the ethical dimension involved in the decision-making process, and be able to discuss the conflicts between economic efficiency and ethical behavior.

Additional outcomes
Students will gain experience in handling case studies and in debating with their peers.

Outline content:

Lectures:

  • Introduction to ethics
  • Ethics and the finance professional
  • Regulation and ethics in financial services
  • Market integrity
  • Fiduciary duties in portfolio management
  • Socially responsible investment

Seminars:

  • Personal and professional ethics
  • Scandals and regulation
  • Insider dealing
  • Fiduciary and other duties of care
  • Screening and portfolio management 

Portfolio Management

Convenor: Jacques Pézier
Credits: 20

Aims:

The module aims to build on the techniques for portfolio selection that will have been introduced in the Securities, Futures and Options module. The module will address both the theory and practice of portfolio management. The theoretical part will examine the issues involved in constructing an investment portfolio, evaluating the performance of that portfolio, and adjusting its composition through time to ensure that its performance remains optimal. It will also consider the use of derivatives in managing risk. The practical part will provide students with hands-on experience of constructing and managing an equity portfolio.

Part 2 - Optional Modules:

Advanced Methods for Financial Research*

Convenor: William T Ziemba
Credits: 10

Aims:

This module will discuss a number of important research topics in finance. It will review current research in various areas, which will include but will not be limited to: the strategies and approaches of a number of great investors and speculators in various financial markets; futures and options; horseracing to stock and mutual fund selection; value investing and hedge fund investing. 

Outline Content:

Class 1: Risk aversion, stochastic dominance and stochastic optimization
Class 2: Analysis of Race track betting strategies and professional syndicates
Class 3: Great Investors and their Strategies
Class 4: How do we research in finance – from idea to publication
Class 5: A topic from the current world of finance.

Bond Market Pricing and Trading Strategies*

Convenor: Andy Bevan
Credits: 20

Aims:

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.

Outline Content:

  1. Flow of Funds and the Economics of Interest Rates
  2. Monitoring Central Banks and the Determination of Short Rates
  3. Pricing and Trading of Short Rate Instruments
  4. Fundamentals of Bond Pricing, Duration and Convexity
  5. Fitting the Yield Curve and Theories of the Term Structure
  6. Trading of Bonds, Bond Forwards and Futures
  7. Pricing and Trading of Interest Rate Swaps
  8. Swap Spreads and Corporate Bond Spreads Through the Business Cycle
  9. Bond Options and Contingent Cash Flows
  10. Cross-Country Risk and Foreign Exchange

Commodity Derivatives

Convenor: Konstantina Kappou
Credits: 10

Aims:

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 and their complexity relative to financial derivatives, with emphasis on the Energy (Oil) and Shipping (Freight) sectors

Outline Content:

  • Introduction to Commodity Markets, History and Evolution
  • Precious Metals. Energy Products. Soft Commodities
  • Main Market Players and Foward Curve. Basis Risk
  • Commodity Derivatives. Exchanges and OTC transactions
  • The Oil Market and its Mechanisms.  OPEC and DOE. Crude Supply and Demand.  Inventories
  • Crude Products and Crack Spreads
  • Refineries and Margins
  • The Freight Market and its Mechanisms.  The Baltic Exchange and the Shipping Industry.  Forward Freight Agreements.
  • Pricing of Commodity Derivatives - Swaps, Options and Structured Trades
  • Trading Techniques and Numerical Examples

Derivatives Securities: Pricing, Hedging and Trading

Convenor: Michael Smith
Credits: 20

Aims:

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.

Outline Content:

  • Review of Option Basics
  • Option Pricing
  • Option Price Sensitivities: Risks and Trading Applications
  • Volatility
  • Volatility Smiles
  • Trading Strategies
  • Currency Options

Empirical Market Microstructure (Available via Distance Learning only)

Convenor: Alfonso Dufour   
Credits: 10

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.

Outline content:

Topic 1 Introduction. Stylised facts about microstructure data.

  • Asynchronous trading
  • Bid-ask bounce
  • Discreteness
  • Intraday volatility

Topic 2 Understanding, measuring and modelling sell-side liquidity.

  • Spread and its components
  • Using GMM estimation methods

Topic 3 Understanding, measuring and modelling buy-side liquidity.

  • Implicit transaction costs
  • Liquidity providers

Topic 4 Measuring buy-side transaction costs.

  • Estimating Vector Autoregressive Models

Topic 5 Assessing the contribution to price formation.

  • Applying cointegration.

Ethics in Finance

Convenor: Carol Padgett
Credits: 10

Aims:

Introduces different schools of ethics and provides the framework needed to identify ethical and non-ethical responses to choices faced in the finance industry. Investigates the ethical standards imposed by financial regulators. Identifies the ethical dimension involved in the decision-making process and the conflicts between economic efficiency and ethical behaviour.

Outline Content:

Lectures:

  • Introduction to ethics
  • Regulation in financial markets
  • Socially responsible investment
  • Insider dealing
  • Corporate governance
  • Mergers and acquisitions

Seminars:

  • Regulation: Enron
  • Screening and “ethical” portfolios
  • Insider dealing: ImClone
  • Bankruptcy: WorldCom case
  • Hostile takeovers: Comcast and Disney
  • Vasiek's short rate model
  • Market calibrated short rate models of Ho / Lee and Hull - White
  • Valuation of interest rate products

Financial Econometrics

Convenor: Alfonso Dufour
Credits: 20

Aims:

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 method of maximum likelihood estimation will be given, and emphasis will be placed on modelling volatility and its prediction. 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.

Outline Content:

Topic 1: Stylised characteristics of financial data

Topic 2: Univariate linear time series models

  • ARIMA (Box Jenkins) approaches- model identification, estimation and diagnostic testing
  • Forecasting using ARIMA models; forecast appraisal

Topic 3: Simultaneous equations models

  • Simultaneous equations bias
  • Identification
  • Estimation, triangular systems
  • Case study: the relationship between trading activity and the bid-ask spread

Topic 4: Vector autoregressive models

  • Motivation, formulation, estimation
  • Comparison with structural models
  • Causality, impulse response functions, variance decompositions

Topic 5: Co-integration revisited: the Johansen approach, hypothesis testing using Johansen

Topic 6: Volatility modelling using generalised autoregressive conditionally heteroscedastic model

  • The ARCH Family of models
  • Testing for ARCH effects
  • Estimation issues
  • Variants and extensions of the ARCH model
  • Multivariate GARCH

Topic 7: Simulations methods in econometrics and finance

  • Motivation
  • Pure simulation versus bootstrap
  • Variance reduction techniques

Topic 8: Guest speaker from an investment bank

Topic 9: urther econometric analysis using EViews


Financial Regulation and Regulatory Policy

Convenor: Richard Dale
Credits: 10

Aims:

This module aims to provide both a theoretical basis for financial regulation and a description of its practical application. The focus is on prudential regulation that is designed to maintain systemic stability while also protecting depositors, investors and counterparties in banking, securities and derivatives markets. The module explores a number of key regulatory policy issues, including the balance between official and self-regulation, the nature and scope of ‘moral hazard’ in financial markets and alternative approaches to capital adequacy assessment.

Outline Content:

Topic 1: The objectives, techniques and scope of financial regulation. The moral hazard issue. Preventive versus protective regulation.
Topic 2: Preventive regulation. Capital adequacy: the 1988 Basle Accord, the 1997 Market Risk Amendment and the EU Capital Adequacy Directive.
Topic 3: Alternative approaches to capital adequacy assessment: the 1999 Basle proposals, the pre-commitment approach and the use of market indicators (credit ratings and subordinated debt).
Topic 4: Protective regulation: deposit insurance and the lender of last resort.
Topic 5: The separation issue: the regulatory interface between banking and securities business: Regulating financial conglomerates.
Topic 6: Risk and regulation in derivatives markets.
Topic 7: isk and regulation in payments, clearing and settlement systems.
Topic 8: The structure of financial regulation.
Topic 9: International regulatory co-operation.
Topic 10: Anatomy of a crisis: the Asian debt crisis and its regulatory implications.

Foreign Exchange and Money Markets*

Convenor: Richard Comotto
Credits: 20

Aims:

The basic aim of this module is to equip students with a firm understanding of the structure and operation of the foreign exchange and short-term interest rate markets. This will not only provide the technical knowledge required to trade in or use those markets, but will also introduce and illustrate a number of key financial concepts such as balance sheet constraints, liquidity, funding issues, no-arbitrage pricing and arbitrage. The module has a strong practical flavour. Students will be given the opportunity to trade various money market instruments on simulated electronic markets.

Outline Content:

  • The functions of the money market.
  • Traditional cash instruments: deposits, Treasury bills and bank bills.
  • Interest rate risk management in the money market.
  • Money market derivatives: FRA. The mechanics of FRAs: early
  • payment and discounting of the settlement amount.
  • Money market derivatives: money market futures.
  • Measuring market risk in the Trading Book --- VaR. Concept. Origins.
  • Techniques. Advantages and disadvantages. Necessary supporting
  • techniques: back-testing and stress-testing.
  • Money market arbitrage and spread trades. Cash versus FRAs. Cash
  • versus futures. FRAs versus futures. FRAs versus forward foreign
  • exchange.

Hedging*

Convenor: Jacques Pezier
Credits: 20

Aims:

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.

Outline Content:

Topic 1: Assessment of risk, risk attitude, risk adjusted performance measures
Topic 2: Risks in financial markets and hedging principles
Topic 3: Market Risk: Static Hedging
Topic 4: Market Risk: Dynamic delta hedging
Topic 5: Market Risk: Gamma and volatility hedging; portfolio insurance
Topic 6: Credit Risks: Credit derivatives and other forms of credit risk mitigation
Topic 7: Multifactor hedging: Forex and interest rate risks
Topic 8: Impact of hedging on regulatory and economic capital
Topic 9: Hedging programmes banks, investment firms and corporates

International Securities Markets

Convenor: John Evans
Number of credits: 10

Aims:

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 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 Content:

  • Topic 1 - Fixed Income Analysis.
  • Topic 2 - Fixed Income Analysis.
  • Topic 3 - Rates Trading and Hedging I.
  • Mid-term test 1
  • Topic 4 - Rates Trading and Hedging II.
  • Topic 5 - Credit Analysis and Products I.
  • Topic 6 - Credit Analysis and Products II.
  • Mid-term test 2

Interest Sensitive Securities: Pricing and Hedging (Available via Distance Learning only)

Convenor: Philip Xu    
Credits: 20

Provides students with technical knowledge of how to price and hedge all sorts of debt instruments and to execute active and passive strategies. Via lectures and computer modelling sessions, students learn how to model interest rates and credit risk using market-supplied data, and to apply these models to price a wide variety of debt instruments.

Outline content:

  • Measuring the existing term structure
  • Modelling interest rates
  • Interest rate models
  • Evolutionary models and credit risk models
  • Hedging, standard technology
  • Hedging, advanced technology
  • Pricing non-fixed income securities
  • Credit derivatives and embedded options.

Liquidity Risk*

Convenor: Alfonso Dufour
Credits: 10

Aims:

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.

Outline content:

  1. Introduction. Security trading industry.
    New market mechanisms, intercontinental exchanges and regulatory challenges: fragmentation and consolidation (NYSE-Euronext, NASDAQ-OMX, LSE-Borsa Italiana).
  2. MiFID and Reg-NMS.
    Recent regulatory trends and expected impacts on markets (Transparency, Fragmentation, Internalisation)
  3. Traders and their motivation to trade. Profit motivated traders. Utilitarian traders. Liquidity suppliers.
  4. Order book trading: The LSE rule book
  5. Transaction cost measurement
  6. Execution Risk and Optimal Trading Strategies.

Market Risk

Convenor: Emese Lazar
Credits: 20

Aims:

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.

Outline Content:

  • Market Risk Management
  • Understanding Volatility
  • Covariance Matrices
  • Market Risk Metrics
  • Market Risk Control
  • Value-at-Risk Models
  • Model Validation
  • Scenario Analysis

Principles of Financial Engineering

Convenor: Salih Neftci
Credits: 20

Aims:

The module will present an applied, innovative approach to Financial Engineering from a practical point of view. Cutting-edge issues from financial markets will be utilized in a systematic in a way to discuss and identify the principles of Financial Engineering. The treatment focuses on the mechanics of major applications in today's markets.

Outline Content:

  • Introduction
  • What Is a Synthetic?: A Cash Flow; Cash flows in different currencies; Cash flows with time differences; Cash flows with different market risks; Cash flows with different credit risks; Cash flows with different volatilities; Cash flows with different sensitivities
  • Forward Contracts
  • Currency Forwards: Engineering the Currency Forward; Which Synthetic?; Money market synthetics; A Synthetic with Tbills; Which Synthetic to Use?
  • Synthetics in Pricing: Pricing with bid-ask spreads
  • A Contractual Equation: The Choice of X
  • Applications: I: A withholding tax problem; II: Creating Synthetic Loans; III: Capital Controls; IV: "Cross" Currencies
  • Which Synthetic?: FX-Swaps; Advantages; Quotation conventions
  • Real-life Complications: Bid-Ask Spreads; Credit Risk; Arbitrage possibilities
  • Futures: Examples; Marking-to-market; Cost of Carry and Synthetic Commodities; A final remark
  • Swaps: Major swap structures and their uses; pricing and hedging swaps; uses of swaps.
  • Credit instruments: How to engineer CDS's, CDO's? Pricing of CDSs.
  • Options and swaptions: Mechanics of options and the role of volatility. Type of volatility; volatility smile. How to engineer the volatility smile?
  • Measure change technology: Forward Libor and Swap measures; Applications to swaptions.
  • Quote Conventions.

Real Estate Finance

Convenor: Charles Ward
Credits: 10

Aims:

Aims to apply some key corporate finance issues using real estate as the core example. Examines what makes real estate different, why companies are selling it and how it is affected by mergers and take-overs. Real estate is one of the most important assets held by companies, it is used as security for more debt than any other asset, widely used in leasing transactions yet hardly figures in any corporate finance textbook.

Research Project

Convenor: Charles Sutcliffe
Credits: 20

Aims:

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.

Outline Content:

The self-directed nature of study for this model should encourage students to be resourceful in their search for relevant literature and data, and to manage the various stages involved effectively, leading to timely submission of the finished piece.

Stock Index Futures

Convenor: Charles Sutcliffe
Credits: 10

Aims:

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.

Theory and Ethics in Islamic Economics and Finance

Convenor: INCEIF Faculty
Credits: 10

Aims: 

To provide students with a critical understanding of Islamic economy by considering the implications of the application of Shariah law for the economic and financial systems. Topics include:

  • Scope of Islamic economics and finance in relation to conventional economics and finance
  • History of the Islamic economic system in various eras
  • Contributions by Islamic economists or Muslim thinkers
  • Wealth creation and mobilisation
  • Concept of money, risk and returns from an Islamic perspective.

Topics in the History of Finance*

Convenor: Adrian Bell
Credits: 10

Aims:

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.

Trading and Exchanges (Available via Distance Learning only)

Convenor: Alfonso Dufour
Credits: 20

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.

Outline content:

Lecture 1 Introduction.

  • Security trading industry.
  • Overview of exchanges and orders.

Lecture 2 Market structures.

  • Types of auctions: call and continuous auctions.
  • Electronic markets and trading systems.

Lecture 3 Equilibrium prices and quantities and trader’s surplus

  • Experimenting with private information and equilibrium

Lecture 4 Traders and their motivation to trade.

  • Value motivated traders.
  • Utilitarian traders.

Lecture 5 Auctions

  • Experimenting with different types of auctions

Lecture 6 Market microstructure theory.

  • Inventory and asymmetric information models.
  • Market makers and spread.

Lecture 7 Adverse selection: The market for lemons Experimenting with asymmetric information

Lecture 8 Sell-side traders: Market-makers, block facilitators, dealers, specialists and brokers.

  • Buy-side traders.
  • Experimenting with market making

Lecture 9 Comparing market performance.

  • Efficiency.
  • Transparency.
  • Liquidity.
  • Competition and fragmentation.

Lecture 10 Conclusion. 

Volatility Analysis

Convenor: Carol Alexander
Credits: 20

Aims:

This module 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