ICM266-Essentials of Financial Engineering

Module Provider: ICMA Centre
Number of credits: 10 [5 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Current from: 2018/9

Module Convenor: Mr Lee Burrows

Email: lee.burrows@reading.ac.uk

Type of module:


Summary module description:

This module introduces the most essential concepts of Financial Engineering; from replication of cash flows, to asset valuation under no-arbitrage assumptions and the law of one price. These methods are applied to various complex securities traded in financial markets.

The module provides an introduction to the basic techniques employed in Financial Engineering. Students will understand how these methods can be applied to design securities with desired payoff characteristics. They will be able to evaluate complex security structures by means of reverse engineering and be aware of possible problems when these methods are applied to real world situations.

Assessable learning outcomes:
By the end of the module, the student will be able to

  • Explain the usefulness of Financial Engineering
  • List and describe basic financial securities used in Financial Engineering
  • Explain the concept of no-arbitrage and the law of one price
  • Demonstrate how basic financial securities can be used to design more complex securities
  • Apply reverse engineering techniques to value complex securities and analyze these from a risk management perspective
  • Discuss problems occurring in real world applications

Additional outcomes:
Students will become familiar with several examples of structured financial products.

Outline content:

  • Introduction to Financial Engineering, cash flow engineering, basic financial products, interest and forward rates, no-arbitrage and the law of one price

  • Pricing and hedging by replication, major interest rate (IR) swap structures, currency forwards and cross currencies FX-swaps, options

  • Structured products, introduction and evaluation

  • Dynamic strategies for hedging and principal protection

  • Credit markets: CDS engineering, credit indices and CDO’s

Brief description of teaching and learning methods:
Core lectures supported by classroom based tutor led discussion. Numerical exercises will require advanced use of Excel spreadsheets, as well as Bloomberg and Reuters applications.

Contact hours:
  Autumn Spring Summer
Lectures 10
Seminars 4
Guided independent study 86
Total hours by term 100.00
Total hours for module 100.00

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

Summative assessment- Examinations:

One 1.5-hour written examination (70% of final mark)

Summative assessment- Coursework and in-class tests:

One 1-hour Multiple-choice Test (30% of final mark)

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

Assessment requirements for a pass:
50% minimum overall mark

Reassessment arrangements:

Re-assessment in August by written examination

Additional Costs (specified where applicable):
1) Required text books: i) Principles of Financial Engineering, by Robert Kosowski and Salih N. Neftci, Academic Press Advanced Finance, ISBN: 978-0123869685, 2014, £63.00
ii) Option, Futures and Other Derivatives, John C. Hull, 2011, Pearson, ISBN: 978-0273759072, £67.00
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: 9 November 2018


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