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Module Specifications

Current Academic Year 2012 - 2013
Please note that this information is subject to change.

Module Title Financial Engineering
Module Code EF5122
School DCUBS
Online Module Resources

NFQ level 8 Credit Rating 5
Pre-requisite None
Co-requisite None
Compatibles None
Incompatibles None
Description
The purpose of this module is to familiarize students with the practical use of derivatives and other financial instruments in advanced speculation, hedging and arbitrage. This will be achieved by illustrating the various techniques used in financial engineering and the pricing theory (No Arbitrage Pricing/Risk Neutral Valuation) that provides their conceptual underpinning. The emphasis will be, first, on how elementary payoffs can be combined, either statically or dynamically, to create more complex structures and, conversely, how complex financial contracts and other bundles of payoffs can be decomposed into more elementary ones. This perspective will allow the treatment of both pricing and hedging problems under a unified framework, and will provide the framework for the discussion of risk measurement and management problems and methodologies.

Learning Outcomes
1. Identify the types of financial risks faced by corporations and financial institutions.
2. Assess the strategies that may be used to manage the various types of financial risks.
3. Value simple financial instruments and explain the process of how more complex financial products may be valued.
4. Critique recently developed metrics and concepts in the areas of financial engineering and risk management
5. Identify the potential risks and limitations associated with valuation models being used



Workload Full-time hours per semester
Type Hours Description
Lecture24No Description
Tutorial10Guided solution of assigned problems and exercises
Seminars5Participative attendance of seminars offered by industry experts and/or academics
Assignment20Answer assigned short answer questions and problems
Laboratory20Practice writing elementary programs (in Visual Basic) and in the creation of MS Excel spreadsheets for financial calculations and analysis
Independent learning time20Reading references (textbook and lecture notes) for weekly lectures. This should be done ahead of weekly leactures, to maximize in-class learning and allow the students to actively debate the material presented in class, and after the lectures, to solidify the learning of the material
Examination2No Description
Independent learning24Exam preperation
Total Workload: 125

All module information is indicative and subject to change. For further information,students are advised to refer to the University's Marks and Standards and Programme Specific Regulations at: http://www.dcu.ie/registry/examinations/index.shtml

Indicative Content and Learning Activities
No Arbitrage Pricing.
Replication of financial and non-financial payoffs; No-Arbitrage and Risk Neutral Valuation (RNV); applications of RNV using binomial trees (in depth) and Monte Carlo simulations to the pricing of derivatives, including elementary exotic options (e.g., Asian and barrier options); discussion of RNV foundations of Black & Scholes (B&S) model, B&S vs Black’s model..

Dynamic replication.
Option delta hedging; volatility trading; portfolio insurance.

Credit risk management and valuation.
Credit risk management and credit derivatives; structured finance; pricing implications of credit risk.

Structuring new products.
Basic types of structures; exotic options; applications of financial engineering to investment management, corporate finance, risk management and strategic decision making (real options)..

Assessment Breakdown
Continuous Assessment25% Examination Weight75%
Course Work Breakdown
TypeDescription% of totalAssessment Date
Multiple choice questionsQuiz containg MCQs or questions that require short answers25%Week 7
Reassessment Requirement
Resit arrangements are explained by the following categories;
1 = A resit is available for all components of the module
2 = No resit is available for 100% continuous assessment module
3 = No resit is available for the continuous assessment component
This module is category 1
Indicative Reading List
  • John Hull: 0, Options, Futures, and Other Derivatives, 8, Pearson, 0-13-216484-9
  • Salih N. Neftci,: 0, Principles of Financial Engineering, Second Edition, 9780123735744
Other Resources
None
Array
Programme or List of Programmes
MFCMMSc in Finance
PBSSAPG Exchange(Business School)
Timetable this semester: Timetable for EF5122
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