module specification

The module provides students with a wide range and in-depth knowledge of the major exchange-traded and over-the-counter traded financial instruments used in the construction of financial products.
The module discusses the characteristics, pricing and valuation of the fundamental instruments, terminologies and contract specifications for the trading in both cash markets and derivative markets. The module analyses how these instruments can be combined to create structured products. The module also covers complex structures, their composition, valuation and risk hedging possibilities. 
Students will develop an understanding of the use of these financial instruments as investment vehicles, hedging tools, engineered products, arbitrage mechanisms, and speculative instruments.
Students will also develop data collection and analysis skills utilising Bloomberg and spreadsheets, demonstrate enhanced academic writing, and oral presentation.

• Skills of Financial Engineering LO1
• Use of Bloomberg to identify exposure to risk from an investor’s and institutional perspective and determine how a position might be hedged using exchange-based instruments; LO2

• Options and Futures: using options and futures to engineer structured products, hedging portfolio market risk, ‘fair’ pricing, and speculation. LO2
• Bonds. Gilt and STRIPs: Short term interest rate products and Bonds, Exchange-based and OTC futures forwards and options, Caps, Floors and Collars
• Convertible Bonds: the rationale for their use, their structure, and relationship to other instruments
• Swaps: The rationale behind interest rate and currency swaps, structuring a swap, calculating the periodic cash flows in a fixed-to-floating swap, and swaps with special features
• Calculation of ‘fair value’ spread for swaps with special features, Identifying risks

• Construct a zero curve and use the zero curve to assess the fair pricing of simple and complex structured products; LO3
• Use of Bloomberg to identify analyse and report on the risk associated with a variety of financing structures;
• explain the principles underlying value at risk;
• utilise numerical, research, critical and analytical skills to solve problems and make practical decisions  LO4
• Bootstrapping a yield curve
• Capital Guaranteed, Yield Enhancement and Participation Notes
• Value at Risk

This module will be taught using a 2-hour lecture and a 1-hour tutorial. The lectures will be used to introduce and give examples of the instruments being discussed.
Students will be encouraged to form study groups in order to carry out independent research into the background of the topics introduced in lectures, and to solve set problems. Material will be supported by use of Bloomberg analytics.
Teaching is structured around three hours of weekly contact time with the students. The three hours of contact time are structured as follows:
• Lectures – Two hours per week – The lecture will serve as a vehicle for introducing and giving examples of the instruments being discussed. Students will work in small and large groups and feedback will be provided during the small test at the beginning of each lecture. This will enable students with reflective practice necessary for planning of their Personal Development Portfolio (PDP).
• Tutorials – One hour per week – The tutorials will be used to give the students an opportunity to consolidate their understanding by working through examples based on current real-world data from Bloomberg and other sources, for example, the Financial Times and Wall Street Journal. The merits of each type of instrument will be explored and students will work through and analyse additional examples.
Both lectures and seminars will draw on real-world financial data and case studies wherever possible. Data will be taken from published sources such as the Financial Times and Bloomberg, and contract specifications from major derivative exchanges will be used where appropriate. This approach will enable students to appraise financial market issues in a realistic context and develop their ability to think critically and to produce solutions.

On successful completion of this module, students will be able to:

1. develop the skills that are needed to become a financial engineer and use knowledge and expertise in Bloomberg to identify exposure to risk from an investor’s and institutional perspective and determine how a position might be hedged using exchange-based instruments;

2. critically explain the principles of constructing financial products and analyse the risk and return characteristics of structured products; engineer their own structured products and assess the advantages and disadvantages of the instruments identified;

3. construct a zero curve and use the zero curve to assess the fair pricing of simple and complex structured products; analyse and report on the risk associated with a variety of financing structures; explain the principles underlying value at risk; utilise numerical, research, critical and analytical skills to solve problems and make practical decisions;

4. synthesise numerical, research, critical and analytical skills to solve problems and make practical decisions

The module will be examined using three assessment modes. The assessments are divided into a one-hour test, a presentation and a two-hour examination and aim to test that the learning outcomes have been achieved. In particular students will be assessed by means of formative assessment through one-hour test and presentation. Summative assessment applies to unseen examination.
In-Class-Test (50% of the overall mark): This is an unseen and closed standard examination. The duration of the examination is 2 hours. The examination is designed to assess their in-depth theoretical, practical knowledge and critical understanding of the subject of financial instruments covered from week 1 to week 11. There will be questions, which focus on theoretical aspects of the subject material covered and questions, which will require numerical solutions. Summative feedback will be provided after the test.
Presentation (30% of the overall mark): Students will research and present a particular financial engineering product or concept explaining its suitability to investor from a risk perspective. Formative feedback will be provided after the presentation.
Coursework (20% of the overall mark): This is a formal report of 2,000 words. After group presentation, students from each group of presentation are required to write a individual report on the launch of the financial engineering product presented. Formative feedback will be provided after the exam.

Textbooks

Core Texts
Eales, B.A. and Choudhry, M., (2003). Derivative Instruments: a guide to theory and practice, Butterworth Heinemann.
Hull, J.C. (2011). Options, Futures and Other Derivatives, 8th ed., Prentice-Hall International
Other Texts
Cuthbertson, K. and Nitzsche, D. (2001), Financial Engineering: Derivatives and Risk Management,
Eales, B. A., (2000). Financial Engineering, Macmillan Business.
Steiner, R. (2012). Mastering Financial Calculations : a step-by-step guide to the mathematics of financial market instruments, 3rd Edition, Financial Times Prentice Hall
Data source:
Bloomberg

Websites
https://derivatives.euronext.com/en
https://www.dmo.gov.uk/
https://www.bloomberg.com/europe