25877 Financial Market Instruments
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Credit points: 8 cp
Subject level:
Postgraduate
Result type: Grade and marksThere are course requisites for this subject. See access conditions.
Description
Designed for specifically for quantitative finance students, this subject provides a rigorous introduction to the main instruments and markets that comprise the financial system and to pricing using no-arbitrage arguments. It discusses the valuation of various financial securities such as equities and foreign exchange, bills and bonds, forward rates and yield curve calculations, forward rate agreements (FRAs) and interest rate swaps, and interest rate hedging. It also covers option basics including definitions, strategies and valuation. The subject provides students with a number of practical exercises involving implementation of the pricing models and techniques covered.
Subject learning objectives (SLOs)
Upon successful completion of this subject students should be able to:
| 1. | Understand the mechanics of the common financial market instruments and their applications in markets. In particular, students should have an in-depth knowledge of basic fixed income securities, forward and futures on equity, FX and interest rate, interest rate swaps and options |
|---|---|
| 2. | Apply the pricing formulae for these instruments under various scenarios |
| 3. | Compute the risks associated with these instruments and apply techniques to manage these risks |
| 4. | Construct various types yield curves from traded instruments |
| 5. | Understand option contracts and devise option trading strategies |
Contribution to the development of graduate attributes
This subject develops the essential concepts related to the use and pricing of fundamental financial instruments at an advanced, quantitative level. The subject emphasizes the practical applications and the importance of the various traded securities within the financial markets. Many of the concepts covered in this subject are further developed in later subjects in the Master of Quantitative course.
This subject contributes to the development of the following graduate attributes:
- Critical thinking, creativity and analytical skills
- Business practice oriented skills
This subject also contributes specifically to develop the following Program Learning Objectives for the Master of Quantitative Finance:
- 2.1: Apply innovative new financial models to address financial trading and risk management issues
- 5.1: Master quantitative finance technical skills necessary for professional practice
Teaching and learning strategies
The subject is presented in seminar and practical workshop format. The theoretical concepts are presented in lectures and students are lead through practical application exercises.
This subject will use the ‘flipped education’ model where students will have access to online learning resources and will undertake preliminary learning tasks prior to coming to classes where they engage in further learning and practical workshops. Consistent with Learning Futures, the subjects will enable students to experience an effective integration of online and face-to-face on campus learning.
Content (topics)
- Basics of equity markets.
- Fixed-income securities and bond portfolio management with applications.
- The measurement and hedging of interest rate risk.
- Forwards and futures; Valuation of forward contracts, cost of carry.
- FRAs and interest rate swaps. Swap rates; valuation of interest rate swaps
- Yield curve analysis: swap curve construction, forward rate curves, multiple curve construction. Workshop applications.
- The mechanics of options markets, option basics, put-call parity, option trading strategies. Introduction to option valuation. Implied volatility and volatility smiles.
Assessment
Assessment task 1: Assignments (Individual)
| Objective(s): | This assessment task addresses subject learning objective(s): 1, 2, 3, 4 and 5 |
|---|---|
| Weight: | 50% |
Assessment task 2: Final Exam (Individual)
| Objective(s): | This assessment task addresses subject learning objective(s): 1, 2, 3, 4 and 5 |
|---|---|
| Weight: | 50% |
Minimum requirements
Students must achieve at least 50% of the subject’s total marks.
References
Neftci, S. Principles of Financial Engineering, Academic Press Advanced Finance, 3rd Edition
Kosowski, R. and Neftci, S., 2014, Principles of Financial Engineering, 3rd Edition, Elsevier
Tuckman, B. 2011, Fixed Income Securities: Tools for Today's Markets, 3rd Edition, Wiley.
Hull, J. 2018, Futures, Options and Other Derivatives, 10th Edition., Prentice Hall.
Martellini, L and Priaulet, P., 2003, Fixed-Income Securities: Valuation, Risk Management and Portfolio Strategies, Wiley
Choudhry, M., Joannas, D., Pereira, R., Pienaar, R., 2005, Capital Market Instruments Analysis And Valuation, 2nd Edition.