QF3101: Investment Instruments: Theory and Computations
AY2013/2014, Semester 2, Lecturer: Tan Hwee Huat
Course Coverage:
1. Visual Basics for Applications (VBA)
2. Forward, Futures & Hedging
3. Swaps
4. Examples of Forward & Futures
5. Options Trading Strategy
6. Value-at-Risk (VAR)
This module introduces investment instruments commonly available in the financial markets and their computations.
At the beginning of the module, Prof Tan covered some coding basics using VBA. VBA is a coding program that can be use in Excel's developer mode, thus allowing handling of data directly on spreadsheet. There is also a computing project that requires data collection from CME website and coding user-defined functions using VBA to handle the data. A written report is to accompany the quantitative component of the project.
The next part of the module introduces the theoretical aspects of forward, futures and swaps. A forward contract is an obligation to trade a security on the maturity date at a a pre-committed price. A futures is similar in theory but different in execution. The main difference is that a forward contract is traded over-the-counter (OTC) whereas a futures contract is traded on exchange and marked-to-margin on daily basis. Traders do not necessary take delivery of securities when trading forward or futures contract. A swap contract, on the other hand, is an agreement between two parties to exchange cash flow payments over time. One party agrees to pay a fixed rate while the counterparty pays a floating rate tagged to some benchmark interest rate.
The module then go further in depth into the different types of forward and futures contracts in the market. A interest rate futures contract has its underlying asset dependent solely on interest rates, and one can use such a contract to hedge against changes in interest rates. Currency futures and forwards are widely used to hedge against risk exposure to exchange rates. Many corporations use these contracts for short-term hedging. Similarly, stock index futures can be use to hedge against systematic risk that is inherent in portfolios.
Option trading strategies cover the various strategies that one can construct using combinations of puts and calls. This topic focus on the different strategies and their payoff computations. It is covered less in depth and mathematical rigour as compared to MA3269.
VaR is an attempt to provide a single number for senior management summarizing the total risk in a portfolio of financial assets and it has become widely used in the financial industry in recent years. More formally, VaR is the maximum loss that will not be exceeded with a given probability during the risk horizon. It can be summarized as the statement: "We are X% confident that we will not lose more than $V in the next N days." This chapter also covers the common valuation approaches toward a portfolio of financial assets, e.g. Delta-normal approaches, simulation methods and risk mapping.
This module is relatively broad-based, covering a wide range of instruments rather than the depth of a few instruments. This module also complements MA3269 in the sense that the former covers the breadth that was lacking in the latter. The different types of investment instruments give a clearer view of the available (derivative) securities in the market, and how we manage the risk of these assets as a portfolio. Thus, its a very useful module for those who wish have a basic understanding of the financial derivatives that are commonly traded in the market.
Workload: Heavy
Difficulty: Moderate
Grade: B
Course Coverage:
1. Visual Basics for Applications (VBA)
2. Forward, Futures & Hedging
3. Swaps
4. Examples of Forward & Futures
5. Options Trading Strategy
6. Value-at-Risk (VAR)
This module introduces investment instruments commonly available in the financial markets and their computations.
At the beginning of the module, Prof Tan covered some coding basics using VBA. VBA is a coding program that can be use in Excel's developer mode, thus allowing handling of data directly on spreadsheet. There is also a computing project that requires data collection from CME website and coding user-defined functions using VBA to handle the data. A written report is to accompany the quantitative component of the project.
The next part of the module introduces the theoretical aspects of forward, futures and swaps. A forward contract is an obligation to trade a security on the maturity date at a a pre-committed price. A futures is similar in theory but different in execution. The main difference is that a forward contract is traded over-the-counter (OTC) whereas a futures contract is traded on exchange and marked-to-margin on daily basis. Traders do not necessary take delivery of securities when trading forward or futures contract. A swap contract, on the other hand, is an agreement between two parties to exchange cash flow payments over time. One party agrees to pay a fixed rate while the counterparty pays a floating rate tagged to some benchmark interest rate.
The module then go further in depth into the different types of forward and futures contracts in the market. A interest rate futures contract has its underlying asset dependent solely on interest rates, and one can use such a contract to hedge against changes in interest rates. Currency futures and forwards are widely used to hedge against risk exposure to exchange rates. Many corporations use these contracts for short-term hedging. Similarly, stock index futures can be use to hedge against systematic risk that is inherent in portfolios.
Option trading strategies cover the various strategies that one can construct using combinations of puts and calls. This topic focus on the different strategies and their payoff computations. It is covered less in depth and mathematical rigour as compared to MA3269.
VaR is an attempt to provide a single number for senior management summarizing the total risk in a portfolio of financial assets and it has become widely used in the financial industry in recent years. More formally, VaR is the maximum loss that will not be exceeded with a given probability during the risk horizon. It can be summarized as the statement: "We are X% confident that we will not lose more than $V in the next N days." This chapter also covers the common valuation approaches toward a portfolio of financial assets, e.g. Delta-normal approaches, simulation methods and risk mapping.
This module is relatively broad-based, covering a wide range of instruments rather than the depth of a few instruments. This module also complements MA3269 in the sense that the former covers the breadth that was lacking in the latter. The different types of investment instruments give a clearer view of the available (derivative) securities in the market, and how we manage the risk of these assets as a portfolio. Thus, its a very useful module for those who wish have a basic understanding of the financial derivatives that are commonly traded in the market.
Workload: Heavy
Difficulty: Moderate
Grade: B