Advanced Quantitative Finance

15 credits
Autumn teaching, year 1

Following on from Essential Quantitative Finance, this module will provide further instruction on particular financial problems associated with risk analysis and portfolio construction, and a more in-depth knowledge of financial instruments, such as futures and options, laying the foundation for TB2 modules on the Financial Risk and Investment Analysis degree.

All the main concepts will be illustrated by numerous examples and Excel spreadsheets.

Further development of IT skills builds on the knowledge gained in Essential Quantitative Finance, now introducing Matlab programming and the use of Reuters data.

The syllabus covers the following topics:

1. Time Series and Statistical Volatility
2. Modelling Linear Portfolios
3. Newtonian and Stochastic Calculus
4. Introduction to Financial Options

Commodities and Alternative Investments

15 credits
Spring teaching, year 1

This module describes the common types of alternative investments, their valuation and their unique risks, including those associated with limited liquidity and specialised legal structures. Major categories of alternative investments, including real estate, private equity, hedge funds, structured products and – most recently – volatility.

The course begins with commodity markets and the impact of fundamental commodity concepts such as contango, backwardation, physical delivery, seasonality and storage on commodity market trading and the pricing of commodity futures. 

Weekly topics cover: 

1. Types of commodities and their producers and consumers
2. Commodity markets and their characteristics
3. Trading commodity futures
4. Empirical analysis of commodity price behaviour 
5. Socially responsible and ethical investments
6. Trading and investing in real estate
7. High-yield, inflation-proof and convertible bonds
8. Private equity and venture capital
9. Hedge funds: classification of strategies and historical performance
10. Structured investment products
11. Trading and investing in volatility

Corporate Governance and Social Responsibility

15 credits
Spring teaching, year 1

This module is aimed at students on the range of 'conversion' type of MSc programmes across the department and is delivered in the International Accounting and Governance programme as a core. The focus is on contemporary perspectives and practices within the broadly defined areas of Corporate Social Responsibility and Governance.

The module starts from the premise that CSR is a contested, problematic and developing area of study. There is an acceptance that an understanding of ethical frameworks is required to inform debate on this subject and that research generated evidence and insights are necessary to substantiate assertion.

The focus is also practical, and you will individually undertake research into an organisation's orientation and practice towards its stakeholders. A critical and questioning approach to this will be encouraged and required to 'see beyond' the often platitudinous veneer that can characterise this relationship.

Throughout the module the emphasis will be on devloping your own coherent and informed view of matters such as corporate and governance, together with issues of professional ethics within a globalised context. In particular, we examine the extent to which corporate governance practices are moving towards convergence.

The coursework requires you to work individually to produce a case study analysis of contemporary stakeholder issues and to thereby further your understanding and exercise research skills and judgement. Supporting and underpinning this is a week by week seminar programme requiring you to ascertain and appreciate your own and others' 'ethical profiles', locate and interpret research-based insights and undertake case study analysis of organisational practices and professional ethical dilemmas.

An examination will test your grasp of relevant concepts, theory and ability to apply insights.

Corporate Governance

15 credits
Spring teaching, year 1

This module aims to introduce you to the roles and functions of boards of directors as well as the organisational structure of different types of firms, such as those within extended family networks and those of an entrepreneurial nature. This will involve developing understanding of information management systems and accounting techniques that assist effective board-level decision making as well as in the assessment of board and CEO effectiveness. The relevance of different boards structures will be discussed through a comparison of split boards and supervisory boards and the module will cover contemporary issues such as shareholder activism, the role of family and corporate block-shareholder control. Equally, the importance of worldwide differences in legal and institutional settings and their impact on corporate structure and governance will be discussed. While you will gain appreciation into contemporary issues effecting management structure of major corporations you will also be expected to apply this in real-life topical settings.

Equity Investments and Foreign Exchange

15 credits
Autumn teaching, year 1

Weekly lectures cover the following topics:

1. Introduction to international equities
• How equities are traded, foreign exchange risk, trading forex, asset management and investment companies
  
  
2. Risk and return
• Risk aversion, diversification, capital allocation to risky assets, optimal risky portfolios
  
  
3. The capital asset pricing model (first lecture)
• Single index models; capital market equilibrium; capital market line; securities market line; market portfolio; equity beta
  
  
4. The capital asset pricing model (second lecture)
• As above
  
  
5. Arbitrage pricing theory and multifactor models of risk and return
• Multifactor models, Fama-French factors, applications
  
  
6. Financial statement analysis
• Balance sheets, profit and loss reports, financial ratios
  
  
7. Fundamental analysis of equities
• Macroeconomic and industry analysis, price–earnings ratios, equity valuation models
  
  
8. Spot market for FX 
• Global economic balances, purchasing power parity, monetary and fiscal policy, coordination of government controls 
  
  
9. Forward FX
• The London market; FX dealing, types of orders, forward derivatives instruments; no-arbitrage pricing; relationship between interest rates and foreign exchange
  
  
10. Hedging FX risk
• FX risk in international equities, FX risks arising for corporates
  
  
11. FX trading strategies
• Fundamental and technical trading strategies, high-frequency and algorithmic trading.

Essential Quantitative Finance

15 credits
Autumn teaching, year 1

The objective of this module is to give you a thorough grounding in the essential mathematics and statistics required for Spring-term modules on the MSc in Financial Risk and Investment Analysis, and to motivate you to learn the necessary skills by first formulating the quantitative finance problem, and then teaching the tools required to solve it. 

The course is focused uniquely on financial applications of mathematics and statistics, with all the main concepts illustrated by numerous examples and Excel spreadsheets.

The module also aims to encourage the development of IT skills and in particular you will be trained to use Excel spreadsheets for data representation and manipulation, through workshops with example. The syllabus covers the following five broad mathematical topics:

1. Probability and statistics
2. Linear regression
3. Linear algebra
4. Calculus
5. Optimisation

The lectures are structured by the following topics in quantitative finance:

1. Modelling financial data
2. Bond mathematics 
3. Distributions of asset prices and returns 
4. Stochastic processes for asset prices and returns 
5. Simple linear models in finance
6. Modelling portfolios of financial assets
7. Factor models
8. Mathematics for futures 
9. Options and their mathematics
10. Simulating asset prices and returns
11. Introduction to portfolio optimisation

Each lecture is supported by: 

• a two-hour workshop, in which you will implement in Excel spreadsheets the concepts you have learned during lectures, based on data downloaded using Reuter's, and supported by case studies in the 'Rotman Interactive Trader'. You will be tested on this understanding in the computer-based examination during week 12
• a one-hour seminar, where you are led through sample questions on the final unseen examination. 

Institutions in the Global Financial Market

15 credits
Autumn teaching, year 1

This module examines the role played by financial institutions in the global market structure and in particular the ways in which these institutions manage risk in their investments, with particular focus on management of operational risk. You will address investment banking and the role banks and other actors such as rating agencies play in capital markets. The module will give a detailed exploration of the nature of operational risk and the way risk management is practiced in financial services firms. It will compare and contrast the prevailing regulatory approaches of New York and London, and will provide in-depth discussions of the prevailing international frameworks for regulating and managing operational risk. There will also be a focus on the process of compliance with these regulations, which will be discussed using both lectures and case study material. The module will also include discussions of corporate scandals, the role of the financial media, and prospects for future regulations.

Interest-Rate Sensitive Instruments

15 credits
Autumn teaching, year 1

This module presents the fundamentals of fixed-income and floating-rate investments, one of the largest segments of global financial markets. It covers:

• valuation of cash flows
• bond price and yield
• interest rate risk, duration and convexity
• principle of no-arbitrage
• spot and forward interest rates
• bond futures
• forward rate agreements
• yield curves
• LIBOR
• credit spreads
• basic features and characteristics of interest-rate sensitive instruments and their associated interest rate risk and credit risk
• present value of basis point
• mapping portfolios to risk factors
• securitisation and asset (and mortgage) backed securities
• credit rating
• credit scoring. 

A provisional outline of lectures (to be confirmed when the convenor has been appointed) including one revision lecture at the end, is as follows:

1. Characteristics of fixed and floating rate debt securities 
2. Principals of valuation; Spot and forward interest rates
3. Interest rate swaps and LIBOR
4. Yield curves: term structure characteristics and credit spreads
5. Interest rate risk and other risks associated with debt securities
6. Cash flow mappings
7. Securitisation – asset and mortgage-backed securities
8. Interest-rate sensitive derivatives and their characteristics: interest rate futures, FRAs, vanilla interest rate swaps 
9. Hedging interest rate risk
10. General principles of credit risk

Investment Risk Project

15 credits
Spring teaching, year 1

Market and Credit Risk Analysis

30 credits
Spring & summer teaching, year 1

You will choose between a designated market risk analysis or credit risk analysis project, concerning the application of either value at risk (VaR) and expected tail loss (ETL), or credit valuation adjustments (CVA) to a hypothetical portfolio, based on real historical data. You work individually to analyse the risks of the portfolio using its historical performance on paper, which you begin to track during Spring term. In the final term you write a detailed report on your work and finally make an individual presentation of the results, as if to the Head of Risk Management and the Risk Management & Control team in a financial institution.

This foundation of market risk analysis and the basic VaR models for assessing market risk, including the mapping of fixed-income, equity and option portfolios to risk factors, the construction of covariance matrices and their application to the market risk of portfolios, are required to undertake this project. These skills are taught in formal lectures and seminars during Spring term and assessed during the last week of that term and in exam time. 

VaR and ETL is computed at the portfolio level using historical and Monte Carlo simulation (and, where possible, analytic solutions) and the results are compared and backtested. The credit risk side covers credit scoring models, counterparty credit risk (especially credit exposure, default, and recovery processes) and credit spreads, portfolio models of credit risk and CVA. 

The lectures will be structured as follows:

1. Introduction to market risk
2. Market VaR and ETL at the portfolio level
3. Cash flow mappings for securities and options
4. Decomposition of portfolio market VaR and ETL
5. VaR and ETL for options
6. Backtesting models and stress testing portfolios
7. Introduction to credit risk
8. Mitigation of counterparty credit risk
9. Modelling credit exposures
10. CVAs
11. CVA hedging

Portfolio Management

30 credits
Spring & summer teaching, year 1

Working in small teams (typically 4–6), you will be given a mandate to construct an investment portfolio. You will track its performance, write a report and make a presentation to a client (a panel with at least one faculty member and one associate tutor), as if you were already working in the fund management industry.

Formal lectures during Spring term focus on:

• Methods for integrating information, both objective and subjective (Treynor-Black, Black-Litterman, Least-discrimination approaches), for portfolio allocation
• Understanding utility-based investment criteria (certainty equivalent, Generalized Sharpe and information ratios) for portfolio optimisation
• Examining specific portfolio strategies (e.g., pension funds, hedge funds, portfolio insurance)

1. Securities markets and institutions; modelling of returns
2. Mean-variance analysis
3. Factor models; market equilibrium; Treynor-Black method
4. Performance measurement; Utility functions and certainty equivalents
5. Black-Litterman and least-discrimination methods
6. Technical and fundamental analyses for equities and bonds
7. Derivatives for investing and hedging; portfolio insurance
8. Special investment products and strategies (structured products, pension funds, hedge funds) 
9. Cost effective trading, risk assessment, performance attribution and reporting

Seminars will consist of:

1. Introduction to the trading platform
2. Interpretation of the management mandate
3. Equity analysis and stock selection screens
4. Implementation of Treynor-Black and Black-Litterman models
5. Guidance for report preparation and presentation

Swaps, Futures and Options

15 credits
Spring teaching, year 1

This module introduces the markets, trading and valuation, and applications of forwards/futures, swaps and options. For each type of derivative, we cover characteristics of the markets and the instruments traded, hedging applications, and no-arbitrage valuation.

We will look at the following topics:

1. Characteristics of forwards and futures
   Characteristics of interest rate and swap futures, bond futures, currency and commodity futures and forwards, stock and index futures, new futures markets
   
   
2. Fair values for futures and forwards
   Principles of no-arbitrage pricing, accounting for dividends, carry costs and convenience yields
   
   
3. Hedging with forwards and futures
   Fundamental concepts, position risk, proxy and basket hedging, short-term hedging and maturity mis-match, case studies for different types of portfolios
   
   
4. Swaps
   The swap market, FRAs and vanilla swaps, decomposition of cash flows, cross-currency and cross-market swaps, variance swaps
   
   
5. Credit derivatives
   Total return swaps, credit default swaps (CDS) and their valuation, CDS indices, the credit crisis
   
   
6. Foundations of option pricing
   Vanilla options, risk-neutral valuation and the Black-Scholes model, the Greeks, hedging options 
   
   
7. Characteristics of vanilla options
   Put-call parity, moneyness and maturity, American options and early exercise
   
   
8. Trading options
   Exchange and OTC trading, issuers and purchasers, bull/bear, spread and volatility strategies, replication of P&L profiles and introduction to structuring
   
   
9. Interest rate options and swaptions
   Caps, floors, swaptions and the LIBOR model
   
   
10. Exotic options
    Exchange options, best-of and worst-of, spread options, Asian options, barrier options, currency protected options, power and chooser options, look-back and look-forward options
    
    
11. Models with stochastic/local volatility and jumps
    Heston, Heston-Jump, GARCH, CEV, SABR, normal mixtures. Model calibration and application.