Fixed Income, Asset Management and Options
Objectives
This course covers the main models and
techniques used to analyze fixed income instruments and their derivatives. The
course aims to provide students with the concepts and tools that money managers
and risk managers use every day to decide on how to allocate investments or to
manage the interest rate risk exposure of mutual funds, hedge funds, insurance
companies, investment banks, and other large nonfinancial firms.
Learning objectives:
A. Knowledge and Understanding
1. Understand the functioning of fixed income
markets
2. Know how to manage a bond portfolio
B. Subject-Specific Skills
1. Estimate the term structure of interest rates
from a set of bond prices
2. Implement an immunization strategy
3. Use derivatives to manage interest rate risk
C. General Skills
1. Improve analytical thinking
2. Use IT tools available to managers
3. Financial theories and markets
General characterization
Code
14510
Credits
3
Responsible teacher
João Pedro Pereira
Hours
Weekly - Available soon
Total - Available soon
Teaching language
Portuguese | English
Prerequisites
Available soon
Bibliography
A set of handouts will be distributed in class. They are based on the
following books:
1.
Veronesi. Fixed income securities: valuation, risk, and risk management. John
Wiley & Sons, 2011. The site http://pietroveronesi.org/teaching/FIS/ has
solutions to exercises, some chapters of the book, and other resources.
2.
Hull. Options, futures, and other derivatives. Pearson, 8th ed, 2012. (or newer
edition)
3.
Tuckman and Serrat. Fixed Income Securities. John Wiley and Sons, 2011.
Teaching method
T. Teaching Methods. The course will follow a standard lecture mode,
where we will:
1.
Discuss the theory of each topic.
2.
Solve applied problems.
L.
Learning Methods. The recommend learning methods are:
1.
Reviewing the content of the lectures and related bibliography.
2.
Solving homework problems
Evaluation method
The assessment of this curricular unit is done
together with the block of curricular units of the same area of knowledge. This
assessment has 3 moments, which together define the final grade of the
curricular unit:
• Individual exam with a weighting of 50% of the
total mark
• Group work with a weighting of 35% of the
total grade value
• Individual reflection-action exercise carried
out at the end of the curricular unit, with a weighting of 15% of the total
grade value. The set of individual action-reflection exercises is a journaling
activity, which will constitute, at the end, a learning portfolio capable of
synthesising the contributions of the Executive Master for that student.
Subject matter
1. Basics of fixed income
a. Markets &securities
b. Price quotes
c. Discount factors & interest rates
d. Fixed-coupon bonds
e. Floating-rate bonds
2. Yield curve fitting
a. Bootstrap
b. Nelson & Siegel model
c. Svensson model
3. Bond portfolio management
a. Duration
b. Immunization
c. Asset-Liability management
d. Convexity
4. Interest rate
a. Forward Rate Agreements
i. Hedging with FRA
ii. Pricing FRA
b. Interest rate swaps
i. Hedging with IRS
ii. Pricing IRS
iii. The swap curve
iv. Asset-Liability management with IRS
c. Forward contracts
i. Hedging with Forward contracts
ii. Pricing Forward contracts
d. Interest rate futures
i. Eurodollar futures
1. Hedging with Eurodollar futures
2. Extending the LIBOR zero curve
ii. Treasury bond futures
1. Cheapest to deliver
2. Hedging T-bond futures
e. Interest rate options
i. Bond options
ii. Caps & floors
5. Term structure dynamics: Vasicek model
a. Bond prices
b. Estimating the parameters
c. Prices of options on zero-coupon bonds