AØKA08204U Fixed Income Derivatives: Risk Management and Financial Institutions (F)

Volume 2015/2016
Education

Elective at MSc in economics
The course is part of the Financial line symbolized by "F"

MSc programme in mathematics-economics

Content

Over the last decades there has been an explosive growth in the use of fixed income derivatives. Derivatives are now commonly used not only in financial institutions but also in many private and public entities. At the same time, the widespread use of derivatives is often blamed for playing a destabilizing role in the recent financial crisis. Obtaining a thorough understanding of the pricing, trading and risk management of derivatives is therefore more relevant than ever before.

Using the quantitative tools employed in industry, students will learn how to characterize financial risks and how to derivatives can be used to mitigate these. As such the course is relevant for students interested in pursuing careers in investment banking, in a public or private treasury operation or within the regulatory authorities.

Learning Outcome

The course will give a thorough understanding of fixed income derivatives, with a focus on how they are used and traded in practice. Fixed income markets, including interest rate swaps, swaptions, caps, floors and credit default swap indices, are some of the most actively traded financial markets, and underpin much of the banking system.

The lectures will be quite quantitative in nature, as the main pricing models will be derived and explained in detail. Nonetheless, lectures will also focus on how derivatives are traded in practice and considerable time will be spent on covering various market standards to ensure that the models are practically applicable. The focus will be on products that are actually traded – how they work, how they are priced and how the risk is quantified and hedged – in a framework that is as close to reality as possible.

Next to the lectures, students will spend considerable time building pricing and risk management models using Excel and VBA. By the end of the course, students will have built a small pricing library that is as close to market standards as possible.

Upon completing the course, the excellent student will:

  • Understand the mechanics underlying a range of fixed income derivatives

  • Be familiar with the terminology used in the industry

  • Appreciate the motivations of various market participants behind the use of fixed income derivatives

  • Understand and be able to apply the models used to price the most common instruments

  • Be able to assess and quantify the risks associated with these instruments, and how these risks can be hedged

  • Have implemented pricing and risk analysis models in Excel and VBA resembling those used in practice


To obtain the grade 12, students are required to demonstrate a thorough understanding of all aspects surrounding fixed income and credit derivatives – from the basic legal framework to the practical implementation of pricing models using Excel and VBA.

The syllabus for the course in Spring 2016:

  • Linderstrøm's Fixed Income Derivatives Lecture Notes (approx. 90 pages)

  • The lecture slides + notes

  • Hagan, Kumar, Lesniewski & Woodward (2002) (excl. the appendices)

  • Hagan (2003)

  • Hagan & West (2006), pp. 89-100

References:
Hagan, P. S. (2003), ‘Convexity conumdrums: Pricing CMS swaps, caps, and floors’, Wilmott Magazine pp. 38–44

  • Hagan, P. S., Kumar, D., Lesniewski, A. S. & Woodward, D. E. (2002), ‘Managing smile risk’, 
    Wilmott Magazine pp. 84–108

  • Hagan, P. S. & West, G. (2006), ‘Interpolation methods for curve construction’, Applied Mathematical Finance 13(2), pp. 89–129

  • Linderstrøm, M. D. (2010), Fixed income derivatives. Lecture Notes, University of Copenhagen

The course is not intended to be an introductory course. Students are assumed to have prior knowledge of fixed income markets and basic Black-Scholes theory (e.g. from “Corporate Finance and Incentives” or “Pricing Financial Assets ”), at least at the level of the Hull textbook ("Options, futures, and other derivatives"). Furthermore, it is important to stress that an integral part of this course will be programming in VBA. While no prior knowledge of VBA is assumed, students are expected to have some basic programming experience and some familiarity with Excel is a definite plus.

In exchange for a reading list that is short in terms of the page count, the lectures will be quite dense and students are expected to devote considerable time over the course of the semester to implement pricing functions in VBA/Excel. To facilitate this, lectures will address not only the relevant theory but also include computer sessions that address practical issues.
3hours of lectures per week for 14 weeks.

Lectures supplemented with computer sessions.

Time and room:
For time and classroom please press the link under "Se skema"(See schedule) at the right side of this page (15E means Autumn 2015, 16F means Spring 2016).

You can find the similar information partly in English at
https:/​/​skema.ku.dk/​ku1516/​uk/​module.htm
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F16;Fixed Income Derivatives”
-Select Period: “Forår/Spring – Weeks 4-29”
-Press: “ View Timetable”
  • Category
  • Hours
  • Exam
  • 48
  • Lectures
  • 42
  • Preparation
  • 116
  • Total
  • 206
Credit
7,5 ECTS
Type of assessment
Written assignment, 48 hours
An individual 48 hours take-home assignment.
Aid
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100 % censorship
Exam period

From June 24, 2016 at 10 am to June 26, 2016 at 10 am

For enrolled students more information about examination, exam/re-sit, rules etc. is available at the student intranet for Examination (English) and student intranet for Examination (KA-Danish).

Re-exam

From August 27, 2016 at 10 am to August 29, 2016 at 10 am

If only a few students have registered for the re-exam, the exam might change to an oral exam including the date for the exam, which will be informed  by the Examination Office.

Criteria for exam assesment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.