Module ECON3381: FINANCIAL DERIVATIVES AND FINANCIAL ENGINEERING

Department: Economics and Finance

ECON3381: FINANCIAL DERIVATIVES AND FINANCIAL ENGINEERING

Prerequisites

• Financial Markets and Institutions

Corequisites

• None.

Excluded Combination of Modules

• None.

Aims

• This module aims to introduce the theory and practice of Financial Engineering, highlighting concepts, products and strategies.

Content

• Introduction to option contracts and stochastic calculus
• Option properties
• Derivation of Black and Scholes (1973) and the pricing of options written on different underlying assets
• The Binomial Asset Pricing Model
• Exotic options
• Estimating volatility and correlation
• Value at Risk (VaR)
• Issues in futures markets
• Financial Engineering and Security Design
• Swaps
• Credit risk and credit derivatives
• Energy and Commodity Derivatives

Learning Outcomes

• By the end of the module students should:
• Appreciate the key functions of modern financial engineering and financial innovation.
• Understand the role, use and pricing of complex derivatives and the numerical techniques needed for derivative pricing.
• Appreciate the role played by options, futures, swaps and other derivatives in hedging strategies.
• Understand key approaches to volatility estimation and VaR.
• Appreciate the growing importance of credit risk and its management in modern financial markets.
• Appreciate the limitations of financial engineering and risk management in complex financial markets.

• Have acquired skills of asset market simulation using stochastic calculus.
• Be able to apply quantitative techniques to the derivation of option pricing models and pricing of options using Black Scholes, Binomial and Monte Carlo techniques.
• To be able to produce volatility and correlation estimates and apply to VaR and option pricing.
• Have acquired the skills to perform excel based option pricing and risk management applications.

• Written Communication - through a summative examination.
• Planning, Organisation and Time Management - e.g. by preparing for examinations.
• Problem Solving and Analysis - e.g. by applying the necessary analytical and quantitative skills, as well as the ability to manipulate concepts in financial engineering, in the summative examination.
• Initiative - e.g. searching relevant literature and information in preparation for examinations.
• Numeracy - e.g. by applying core mathematical and statistical skills to answer a range of examination questions.
• Computer Literacy – e.g. by downloading relevant notes and verifying complex computations in preparation for examinations.

Modes of Teaching, Learning and Assessment and how these contribute to the learning outcomes of the module

• Teaching is by lectures, seminars and workshops. Learning takes place through attendance at lectures, preparation for and participation in seminar classes, and private study. Formative assessment is by a DUO-based multiple choice test. Summative assessment is by means of a written examination.

Teaching Methods and Learning Hours

Summative Assessment

Formative Assessment:

One DUO-based multiple choice test.

■ Attendance at all activities marked with this symbol will be monitored. Students who fail to attend these activities, or to complete the summative or formative assessment specified above, will be subject to the procedures defined in the University's General Regulation V, and may be required to leave the University