MSc Quantitative Finance

This course provides students with the foundations of interest rate concepts and models for the purpose of pricing interest rate derivatives. It covers both single- and multi-period interest rate instruments and term structure models that are based on spot and forward rates. A number of well- known models (e.g. Heath-Jarrow-Morton, LMM, Vasicek, Hull-White and Black-Karasinski) will be studied. In addition, it will cover Basel counterparty credit risk for interest rate derivatives; the definition, institutional features of markets and valuation approaches for credit risk products. Specifically, we will examine expected exposure and effective expected positive exposure, credit value and debt value adjustments, wrong way risk and briefly touch on Basel II alphaFundamental Review of the Trading Book.

BMAN63012 Programme Req: BMAN63012 is only available as a core unit to students on MSc Quantitative Finance

None (However, knowledge of basic derivatives is assumed, e.g. call, put, Black-Scholes etc.)

This course provides students with the foundations of interest rate concepts and models for the purpose of pricing interest rate derivatives. It covers both single- and multi-period interest rate instruments and term structure models that are based on spot and forward rate. A number of well- known models (e.g. Heath-Jarrow-Morton, LMM, Vasicek, Hull-White and Black-Karasinski) will be studied. The course also covers counterparty credit risk and market risk, and examine how such risks may impact on the pricing and risk management of interest rate derivatives.

On completion of this unit successful students will have achieved the following learning outcomes:

• Appreciate the differences between the various types of interest rates, and the theories driving the shapes of the term structure and interest rate models.
• Have a broad knowledge of the simpler single period and more complex multiperiod interest rate contracts.
• Understand the different approaches to modeling interest rates, their different assumptions and the principle of valuation by no arbitrage.
• Have a detailed knowledge of the key spot rate models, the fundamentals of forward rate models and the Libor market model as the most important special case.
• Gain an appreciation of the nature of credit and market risks and examine how such risks affect the price and risk management procedures of interest rate derivatives.

Project (30%)

Written Examination (70%) 2 ½ hour 

• Informal advice and discussion during lectures, seminars, and workshops.
• Online exercises and quizzes delivered through the Blackboard course space. (during workshop time, and through discussion board)
• Responses to student emails and questions from a member of staff including feedback provided to a group via an online discussion forum.
• Written and/or verbal comments on assessed or non-assessed coursework.
• Written and/or verbal comments after students have given a group or individual presentation.
• Generic feedback posted on Blackboard regarding overall examination performance.

 Main text:

Poon, Stapleton and Subrahmanyam (2019) “Pricing and Hedging Interest rate derivatives”, Manuscript, Manchester University and New York University (available on Blackboard).

 

Key References:

Kenyon Chris, and Roland Stamm (2012) Discounting, LIBOR, CVA and Funding, Palgrave MacMillan.

Brigo Damiano and Fabio Mercurio (2006) Interest rate models: Theory and practice, Springer 2nd ed.

Gregory Jon K. (2012) “Counterparty Risk: The New Challenge for Global Financial Markets, John Wiley and Sons, 2nd ed.

 

Other References:

Hull John (2011) Options, Futures and other Derivatives, Prentice Hall. 8th edition.

Cairns, Andrew (2004) Interest rate models: an introduction, Princeton University Press.

Informal Contact Methods

Office hours

Online Learning Activities (blogs, discussions, self assessment questions)

Peer Assisted Study Sessions (group assignment, group based workshop exercises)

Drop in Surgeries (extra help sessions for students on material they may be struggling with)

Face-to-face discussion of sample assignment(s)