ICM231: Financial Instruments

Module code: ICM231

Module provider: ICMA Centre; Henley Business School

Credits: 20

Level: 7

When you'll be taught: Semester 2

Module convenor: Dr Nadia Kappou, email: k.kappou@icmacentre.ac.uk

Pre-requisite module(s):

Co-requisite module(s):

Pre-requisite or Co-requisite module(s):

Module(s) excluded:

Placement information: NA

Academic year: 2024/5

Available to visiting students: No

Talis reading list: No

Last updated: 19 November 2024

Overview

Module aims and purpose

Having established the theoretical basis for security valuation in Semester 1, this module extends students’ understanding to the valuation of financial instruments and their applications. The module aims to introduce the main concepts of derivatives pricing and expand students' knowledge of financial derivatives across the main asset classes: equity, FX, interest rate and credit markets. It sets the right mind-set on how to price financial products and use them in risk management. The module has a significant practical component with seminars that are designed to support the lecture material.

Module learning outcomes

By the end of the module, it is expected that students will be able to: 

• Describe the main features of Equity and FX futures, vanilla and exotic equity options, their pay-offs and some simple analytic pricing approximations,; and explain the motivation for engineering structured products 
• Evaluate some of the most popular swap varieties (including caps, floors and swaptions), and illustrate how they may be used for managing risk 
• Value convertible bonds and discuss the interplay between market and credit risk factors  
• Outline the basic credit derivatives, including total return and default swaps; and how to price and hedge basket derivatives including collateralized debt obligations

Module content

Module content 

Topic 1: Equity and FX Futures. Forwards and Options 

Topic 2: Option prices, sensitivities and empirical evidence 

Topic 3: Exotic Options 

Topic 4: Interest Rate Futures, Forwards and Swaps 

Topic 5: Convertible Securities 

Topic 6: Caps, Floors and Swaptions 

Topic 7: Credit Derivatives 

Topic 8: Structured Credit Products (MBS, CDO, ABCP) 

Structure

Teaching and learning methods

1. Lectures: Weekly two-hour lectures cover the topics. 
2. Seminars: students meet in small groups for a series of one-hour seminars, solving problem sets that directly relate to the content taught in the Lectures. Seminar discussions are based on non-assessed coursework set by the instructors.

Study hours

At least 26 hours of scheduled teaching and learning activities will be delivered in person, with the remaining hours for scheduled and self-scheduled teaching and learning activities delivered either in person or online. You will receive further details about how these hours will be delivered before the start of the module.

Please note the independent study hours above are notional numbers of hours; each student will approach studying in different ways. We would advise you to reflect on your learning and the number of hours you are allocating to these tasks.

Semester 1 The hours in this column may include hours during the Christmas holiday period.

Semester 2 The hours in this column may include hours during the Easter holiday period.

Summer The hours in this column will take place during the summer holidays and may be at the start and/or end of the module.

Assessment

Requirements for a pass

50% weighted average mark

Summative assessment

Penalties for late submission of summative assessment

The Support Centres will apply the following penalties for work submitted late:

Assessments with numerical marks

• where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of three working days;
• the mark awarded due to the imposition of the penalty shall not fall below the threshold pass mark, namely 40% in the case of modules at Levels 4-6 (i.e. undergraduate modules for Parts 1-3) and 50% in the case of Level 7 modules offered as part of an Integrated Masters or taught postgraduate degree programme;
• where the piece of work is awarded a mark below the threshold pass mark prior to any penalty being imposed, and is submitted up to three working days after the original deadline (or any formally agreed extension to the deadline), no penalty shall be imposed;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

Assessments marked Pass/Fail

• where the piece of work is submitted within three working days of the deadline (or any formally agreed extension of the deadline): no penalty will be applied;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension of the deadline): a grade of Fail will be awarded.

The University policy statement on penalties for late submission can be found at: https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmission.pdf

You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Formative assessment

Formative assessment is any task or activity which creates feedback (or feedforward) for you about your learning, but which does not contribute towards your overall module mark.

Weekly problem sets (covered during the seminars) with written feedback to all questions provided at the end of each week.

Reassessment

Additional costs