module specification

The module provides with a wide range and in-depth understanding of the major exchange-based and over-the-counter financial instruments used in the construction of financial products. Starting with introduction to the fundamental instruments used in financial engineering and their valuation, the module proceeds to analyse 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 data collection and analysis skills utilising Bloomberg and spreadsheets.

This module aims to:

1. provide students with an understanding of the major exchange-based and over-the-counter financial products;
2. develop an understanding of their use as investment vehicles, hedging tools, engineered products, arbitrage mechanisms, and speculative instruments.
3. provide students with an advanced course in product structuring
4. develop an understanding of the role played by interest rates in determining fair pricing of structured financing products;
5. develop a critical awareness of the risk management role played by structured products;
   introduce the ideas behind product analysis and assessment of 'suitability-for-purpose'.
6. Develop generic skills of numeracy, cognitive understanding, research,  data collection and analysis, decision-making, academic writing and oral presentation.

• Skills of Financial Engineering
• Options and Futures: using options and futures to engineer structured products, hedging portfolio market risk, ‘fair’ pricing, speculation..
• 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
• 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 provide students with a vision of 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. explain the skills are needed to become a financial engineer and use this knowledge and experience of Bloomberg to reflect upon occupational opportunities and to develop personal development  portfolios;
2. Identify exposure to risk from an investor and institutional perspective and determine how a position might be hedged using exchange-based instruments;
3. demonstrate the principles of constructing financial products and analyse the risk and return characteristics of structured products;
4. engineer their own structured products and assess the advantages and disadvantages of the instruments introduced;
5. construct a zero curve and use the zero curve to assess the fair pricing of simple and complex structured products;
6. analyse and report on the risk associated with a variety of financing structures;
7. explain the principles underlying value at risk;
8. utilise 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 (20% of the overall mark). The test will take the form of a 1-hour test designed to enable students to demonstrate their knowledge of the fundamentals of the topics covered. It will be structured in order to assess the students’ knowledge gained from subjects covered in weeks 1-14. Formative feedback will be provided after the test.

Presentation (20% 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.

Exam (60% of the overall mark). At the end of the semester students will be required to take a two-hour, unseen written examination. The examination is designed to enable students to demonstrate their in-depth theoretical, practical knowledge and critical understanding of the subject. 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 exam.

1. Eales, B. A., (2000). Financial Engineering. Macmillan Business.
2. Eales, B.A. and Choudhry, M., (2003). Derivative Instruments: a guide to theory and practice, Butterworth Heinemann.
3. Hull, J.C. (2003). Options, Futures and Other Derivatives, 5th ed., Prentice-Hall International
4. Steiner, R. (2007). Mastering financial calculations : a step-by-step guide to the mathematics of financial market instruments, Financial Times Prentice Hall

Additional material from Bloomberg and other sources will be distributed during lectures and tutorials.