Postgraduate Course: Financial Engineering (CMSE11290)

Course Outline
School	Business School	College	College of Humanities and Social Science
Credit level (Normal year taken)	SCQF Level 11 (Postgraduate)	Availability	Not available to visiting students
SCQF Credits	15	ECTS Credits	7.5
Summary	This course will focus on the application of derivatives in addressing financial problems. There will be a focus on the the use of futures as risk-management and securities structuring instruments.
Course description	An understanding of how derivatives are priced and used is part of the financial managerżs core body of knowledge and understanding. (For instance, it is a fundamental part of the Chartered Financial Analyst (CFA) charter holder curriculum.) To meet this requirement, the course aims to provide students with the tools, knowledge and understanding of the derivative product set (these are forward and futures contracts, swaps and options), how the instruments are priced and the markets in which they are traded. The emphasis in the course is on financial management and pricing rather than the mathematics of derivatives. To integrate the discussion of these instruments, the course stresses the relationship that exists between derivatives and fundamental financial instruments (cash securities) and, in particular, the important no-arbitrage conditions that underlie the pricing of derivatives. Note that the course does not delve into the more advanced aspects of derivatives valuation such as stochastic processes, although an intuitive understanding of this is required. The course will also cover some non-standard instruments and securities since these now form an important element in financial markets. Financial Engineering involves a shift from focusing on żpricingż to the żapplicationż of derivatives. Syllabus Introduction to financial engineering and derivatives Forwards and Futures: pricing, types, special features of some contracts Application of futures in securities design and risk management Swaps pricing Swaps applications Options and option strategies Pure option strategies Options with fundamental securities Option pricing (Black-Scholes-Merton and binomial) extensions of option pricing value leakage Models for special asset types: embedded options Introduction to financial engineering securities with options: the LYONS case Options and corporate finance (Moody's KMV default prediction model) Greeks of option pricing; creating option sensitivities Financial engineering with exotic options Student Learning Experience Learning will primarily be through reading, thinking, class discussions, attending lectures and tutorials, and solving exercises, and attempting problems. Derivatives concepts can take time to absorb and students should expect to have to go over some ideas several times before they are understood properly.

Entry Requirements (not applicable to Visiting Students)
Pre-requisites		Co-requisites
Prohibited Combinations		Other requirements	For Business School PG students only, or by special permission of the School. Please contact the course secretary.

Course Delivery Information

Academic year 2015/16, Not available to visiting students (SS1)		Quota: None
Course Start	Semester 2
Timetable	Timetable
Learning and Teaching activities (Further Info)	Total Hours: 150 ( Lecture Hours 20, Seminar/Tutorial Hours 9, Programme Level Learning and Teaching Hours 3, Directed Learning and Independent Learning Hours 118 )
Assessment (Further Info)	Written Exam 40 %, Coursework 60 %, Practical Exam 0 %
Additional Information (Assessment)	Individual assignment worth 20% Mid-term exam worth 20% Group assignment worth 20% Final exam worth 40%
Feedback	Students will get written feedback on all coursework. There will be general feedback on the mid-term exam and on the final exam.
Exam Information
Exam Diet	Paper Name		Hours & Minutes
Main Exam Diet S2 (April/May)			2:00

Learning Outcomes
On completion of this course, the student will be able to: Explain and critically discuss the concepts behind financial engineering Understand how derivatives are used by financial practitioners to address problems in finance and investment Formulate and explain the approaches used in current methodologies used to price derivatives, and be able to price a variety of options using both analytical and numerical methods Have an understanding of the theory and practice of engineering of new financial products Explain and be able to apply option pricing to deal with the special nature of different types of underlier