FINN3101: Financial Derivatives and Financial Engineering

• Financial Markets and Institutions (FINN2021)

• None

• None

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

• 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.
• Monte Carlo simulation and the Cox, Ross and Rubinstein (1979) Binomial Asset Pricing Model.
• Exotic options.
• Estimating volatility and correlation.
• Value at Risk (VaR).
• Issues in futures markets.
• Swaps, characteristics and application.
• Credit risk and credit derivatives.
• Energy, weather and insurance derivatives

Subject-specific Knowledge:

• 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 and speculative strategies.
• Understand key approaches to volatility estimation.
• Understand the principles and application of Value at Risk (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.
• Recognise the emergence of new derivatives and their role in hedging energy, weather and insurance risks.

Subject-specific Skills:

• 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

Key Skills:

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

• Teaching is by lectures and practical classes. Learning takes place through attendance at lectures, preparation for and participation in seminar classes and workshops, and private study. Practical application is emphasised through interaction with a derivative education and trading platform.
• Formative assessment is by means of a test.
• Summative assessment is by means of a written online examination and a trading simulation assignment

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