ICM215-Foreign Exchange and Money Markets

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring / Summer term module
Non-modular pre-requisites:
Modules excluded:
Module version for: 2016/7

Module Convenor: Mr Richard Comotto

Email: r.comotto@icmacentre.ac.uk

Summary module description:

The aim of this module is to equip students with a firm understanding of the overall function, structure and operation of the money market including FX. The course covers cash, forward and derivative instruments, and provides the technical knowledge to trade, hedge with, arbitrage and manage these instruments. The course introduces and illustrates a number of key practical trading parameters such as balance sheet, risk capital and other regulatory requirements, liquidity and funding risks and the legal basis of the various instruments, as well as concepts such as OTC markets, netting, fair v market value and basis risk. The course demonstrates that there is a simple body of arithmetic that underlies all money market instruments and that the different instruments are substitutes in liquidity and risk management.

Assessable learning outcomes:
•To define the economic function of the FX and money markets, and identify their key characteristics.
•To analyse the rate of return into its component elements and explain the spreads between the rates on different instruments. To interpret forward rates and the link to cash rates.
•To describe, compare and contrast cash and derivative FX and money market instruments in terms of their structure, operation, application, type of user and risk/return characteristics.
•To apply a common body of financial arithmetic to the pricing and valuation of cash and derivative FX and money market instruments.
•To demonstrate how instruments can be use to take risk outright or in spread/basis trades against other instruments using generic trading strategies, to hedge or to synthesise each other, and to identify arbitrage opportunities.
•To demonstrate the economic relationship between cash and derivative FX and money market instruments.
•To recognise the influence of central bank monetary policy operations on money market rates and the impact of market regulation on trading.

Additional outcomes:
•Familiarity with practical issues such as balance sheet constraints, risk capital and liquidity requirements, liquidity and funding issues, and legal risk.
•Understanding of concepts such as derivatives, OTC markets, netting, fair value, market value, basis risk and no-arbitrage pricing.

Outline content:
1Common concepts and consistent application of money market arithmetic.
2The functions and characteristic features of the money market.
3Comparison of cash money market instruments: deposits, Treasury bills, bank bills, CP, CD and repo. Key indices: LIBOR/LIBID/LIMEAN, other IBORs, EONIA and other OI. Bid/offer spreads and spreads between rates of return on different cash instruments.
4Analysis of rates of return into risk-free rate, risk premia and basis, and sub-components, and comparison across instruments.
5Generic interest rate trading strategies.
6The impact of monetary policy operations on money markets.
7The impact of capital requirements and liquidity regulation on money markets.
8Interest rate risk in the money market: cash and forward rates. The forward curve and yield curve. Forward-forward loans/deposits and positions.
9Money market derivatives: FRA. The mechanics and terminology of FRAs. Use in hedging: early payment and discounting of the settlement amount.
10Money market derivatives: money market futures. Market structure and contract specification. Use in outright and spread risk-taking. Use in hedging: basis risk and managing basis risk.
11Money market derivatives: money market interest rate swaps. Mechanics and terminology. Use in risk-taking, hedging and arbitrage. Pricing swaps. OIS.
12Exchange rate conventions. The FX market. Forward FX: pricing, interest rate parity, covered interest arbitrage and synthetic foreign currency borrowing/lending. FX and currency swaps. Forward-forward FX, NDFs and synthetic FRAs.

Brief description of teaching and learning methods:
Lectures, supported by tutorials. Students will receive pre-course reading on basic money market arithmetic, which they are expected to master before attending classes. Self-marked arithmetic tests are provided on Blackboard. Further arithmetic and instrument self-tests will be made available during the course.

Contact hours:
  Spring Summer DL
Lectures 20 2 22
Tutorials/seminars 8 2 10
Other contact (eg study visits)      
Total hours 28 4 32
Number of essays or assignments      
Other (eg major seminar paper)      

Summative Assessment Methods:
Method Percentage
Written exam 70
Class test administered by School 30

Other information on summative assessment:
2 X 30-minute MCT (15% each)

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Length of examination:
2 hour closed book written examination (answer 2 question: section A – 1 compulsory; Section B – 1 from 2))

Requirements for a pass:
50% weighted average mark

Reassessment arrangements:
By written examination only, as part of the overall examination arrangements for the MSc programme.

Additional Costs (specified where applicable):
1) Required text books:
2) Specialist equipment or materials:
3) Specialist clothing, footwear or headgear:
4) Printing and binding:
5) Computers and devices with a particular specification:
6) Travel, accommodation and subsistence:

Last updated: 21 December 2016

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