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THE UNIVERSITY OF MANCHESTER
ALLIANCE MANCHESTER BUSINESS SCHOOL

Academic Year 2021/22
Semester 2
Course Unit Code BMAN30242

Course Unit Title Financial Engineering
Credit Rating 10 Credits
Year UG 3nd year course unit

Course Coordinator and contact details

Dr George Christodoulakis, george.christodoulakis@manchester.ac.uk

Programmme Restrictions

There are no programme restrictions for this course providing the pre-requisites listed below are met.

Pre-requisites
BMAN23000 (or 20242 for BSc Actuarial Science and Maths). BMAN30091 Financial Derivatives is
strongly recommended. There are no Co-requisite courses or Dependent course units.
Co-requisites & Dependent course units

Ν/Α

Aims

The main aim of this course is to extend students’ understanding of the concepts and techniques of
Financial Engineering and to train students to apply those valuation techniques to the most widely
used types of bonds and interest rate derivatives. This course develops skills in pricing complex
financial instruments such as Options on Bonds, Interest Rate Caps and Floors, as well as Swaps and
Swaptions. It enhances students’ understanding of credit risk modeling and covers Probability of
Default estimation, Credit Ratings, and Credit Default Swaps. In the presence of global sustainability
initiatives taking place in recent years, the course also introduces structured finance and securitization
as a tool to manage credit risk in both corporate and systemic level, as well as the ESG initiative and its
effects on the estimation of credit risk.

Learning Outcomes
By the end of the course successful students should:
• be familiar with various bonds and interest rate derivatives, as well as with techniques used to
price these financial products
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• understand how such derivatives can be valued in a deterministic and a stochastic interest rate
environment
• be able to independently price these and similar financial products
• understand the principle of quantitative credit risk techniques
• be able to apply credit risk related methods to empirical problems
• be able to apply all discussed financial instruments and techniques to hedge or manage
different risk exposures
• be able to assess the effect of ESG factors to credit risk
• be able to understand structured finance securitisation transactions

Employability

All of the above topics are standard issues covered in job interviews, assessments and actual jobs at
leading investment banks, credit rating agencies and consulting firms. Throughout the course we
always attempt to illustrate the practical relevance of theoretical concepts by using real-word
examples.

Social Responsibility


Social responsibility nowadays constitutes an integral part of both academic and the business practice
with a view to contributing to a sustainable economy and society. The course links financial
engineering to sustainability through the introduction of ESG global initiative and its implications for
credit risk.




v A UN SDGs* Environmental Sustainability

Other (please specify)

Corporate ESG policies promote directly and indirectly all US SDGs.





Equality, diversity and inclusion (EDI)

EDI constitutes an integral part of the Social component of ESG. Students will learn how corporations
meet or fail behavioural standards promoting EDI and will have the chance to be involved in real-world
case studies.

Methods of Delivery

The course unit is delivered via lectures, workshops and the e-learning environment Blackboard.

Lecture Hours
3
Thursdays, 2pm to 3.50pm, Simon TH B
Weeks: [21-28] and [32-34]
Seminar/Tutorial/Workshop/Lab Hours
Workshops are used to consolidate your understanding of the materials covered in lectures up to the
date of the workshop. There will be four one- hour workshops in total. Questions will be posted in
advance of each session on Blackboard. They must be completed prior to each workshop and then
suggested answers will be provided during each workshop. The answers will also be posted on
Blackboard after the workshop has taken place. Students are expected to actively participate and
present their suggested answers in each session.

Workshop time and venue
Depending upon your individual timetabling restrictions, you will be allocated to one of the workshop
groups. Exact details to be announced.

Private Study

In addition to preparing for workshops, you need to spend time every week:

1. Reviewing your lecture notes
2. Completing the quizzes provided
3. Undertaking the recommended readings
4. Preparing for summer exam

Please do try to keep up with the readings and other work set through the course as this will help to
develop your understanding of the fundamentals of financial engineering and reduce the amount of
work you will need to do for the examination. There is a tool in Blackboard which allows the tutor to
identify those students who are not reviewing and accessing the course materials via Blackboard.


Total Study Hours

As an approximate guide to how you should allocate your time on this course, you should bear in mind
that, according to the University’s guidelines, each 10 credits should be equivalent to 100 hours of
work. BMAN30242 is a 10 credit course and therefore you should allocate a total of 100 hours over the
semester as follows:

Formal classes: Lectures (10x2hours) Workshops (4x1 hour)

Self-study: Reading, workshop questions and exam (76 hours)

Total: 100 hours

Expect to spend at least half a day per week on self-study, workshop preparation and the quizzes. You
will also need to set aside time to revise before the semester assessment and the exam in May.
Attendance

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Please note that attendance at all lectures and workshop is compulsory and will be monitored. By
failing to attend the lectures and workshops and familiarising yourself with the course content, you are
drastically reducing your chances of passing the exam.

Syllabus and Teaching Schedule

Lectures

Week Date of Lecture Lecture Topic
21 10 Feb 2022 Introduction, term structure, FRAs, floating rates
22 17 Feb 2022 Eurodollar futures contract, dollar maturity gap, duration
23 24 Feb 2022 Treasury Bill futures contracts, Interest rate swaps
24 3 Mar 2022 Binomial models and interest rate trees
25 10 Mar 2022 Modelling Stochastic Interest Rates, Valuation of Options on Bonds
26 17 Mar 2022 Caps and Flows, Swaps and Swaptions
27 24 Mar 2022 Introduction to Credit Risk and Scoring modes
28 31 Mar 2022 Credit Default Swaps
32 28 Apr 2022 Structured Credit and Securitizations
33 05 May 2022 The Effect of ESG Risk to Credit Risk
34 12 May 2022 Revision Class

Reading List

This course is based largely on two main books listed below. Reading the corresponding book chapters
is highly recommended for successful completion of the course. Some further supplementary reading
materials may be provided at a later stage of the course.

1. Option, Futures, and Other Derivatives, John C. Hull, Prentice Hall.
2. Financial Engineering: Derivatives and Risk Management, K. Cuthbertson and D.
Nitzsche, John Wiley and Sons, New York, 2003.

You may also wish to consult other texts, such as:

3. Gunter Löffler, Peter N. Posch., 2007, Credit risk modeling using Excel and VBA, Wiley, available
online
4. Derivative Securities, R. Jarrow and S. Turnbull, South-Western College Publishing, UK, 2000.
Especially the relevant chapter 5 and section 15.3.
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Assessment

100% via a written examination

A 2-hour exam paper is designed to examine your knowledge of all module topics. The exam has the
following format:

• Section A: 15 multiple choice questions, counting for 30% of the mark. (1 hour)
• Section B: two open questions (potentially with sub-questions) related to all lecture material,
to be chosen from a set of four questions. Together these three questions count for 70% of the
mark. (1 hour)

In order to successfully prepare to the final examination, student are encouraged to follow the lectures
and further augment their knowledge by reading corresponding textbooks and articles, and by solving
tutorial exercises. All these sources of information are designed to complement each other and
together they compose an integrated approach towards examination.

Before the final lecture, students are encouraged to submit questions/topics via e-mail, which they
would like to be reviewed during the last lecture.

Self-assessment:

Students can and should assess their own progress through solving the available workshop and quiz
material and consult the lecturer for further advice. Answers to these workshops and quizzes will be
further discussed in the Revision lecture at the end of the Semester.


Re-sits

The resit exam paper takes the same format as the main exam, although the actual questions will of
course be different.

Marking Process

The exam marking will follow the criteria set by Alliance Manchester Business School in relation to
Undergraduate courses. A copy of such criteria can be found at the end of this module outline.

Plagiarism

Please refer to the Plagiarism section on the online undergraduate handbook to see the definition of
plagiarism and other forms of academic malpractice;
https://ughandbook.portals.mbs.ac.uk/Myassessment/Plagiarism.aspx


Feedback

Personalised feedback about performance on your study, e.g. lecture material, workshop questions
and quizzes will be provided upon request after each lecture during office hours. We strongly advise
you to make use of this opportunity during the term as this will give you very useful indications for the
direction of your efforts and could potentially enhance your performance in the exams.

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Generic feedback on performance on the May examination will be provided on Blackboard within 15
working days of the examination date. It will provide a review of overall exam performance and
highlight where questions were answered well and poorly. Students wishing to discuss individual exam
performance should email the lecturer in order to make an appointment to see them on the matter.

We highly welcome feedback from students on our lectures, and any suggestions for further
improvement of the course. Please do not hesitate to email your lecturer with feedback on any matter
related to the course. Students will have the opportunity to fill in a course unit questionnaire at the
end of the course, and we would strongly encourage them to do so as we highly value their input in our
course.

How to contact us and get help

The easiest way to do well on this course is to attend the lectures and to engage in making required
workshop questions, on-line quizzes and readings. If you need help with your work then there are
various ways to get in touch.

Discussion Board

If you have a question or information that you feel is of general relevance to students on the course,
you should share it with your colleagues via the discussion board on Blackboard. The module leader
will monitor this resource but students are encouraged to try to answer each other’s queries as much
as possible.

Email

If your query is not appropriate for a public discussion board, you can email your course lecturer. In
most instances, queries will be resolved electronically should you provide sufficient information. We
aim to answer all questions within three business days. The lecturer’s email address is:

george.christodoulakis@manchester.ac.uk
Please remember that queries relating to the course should usually be made using the relevant
discussion board on Blackboard. If we feel your email query would interest others in the group, then
we may direct you to post your question on the discussion board rather than deal with it by email.

Office Appointments

If you do need to make contact over a critical issue, we offer you the opportunity to book a meeting
with your lecturer during a mutually convenient time slot. Please email the lecturer to make an
appointment. Meetings do not serve to provide private tutoring on lectures that have not been
attended by students. Meetings also do not serve to discuss prior exam questions or to provide any
kind of “inside information” about upcoming exam questions. We strongly aim at treating all
students equally, which means providing equal information to everyone.


END OF MODULE GUIDE







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ALLIANCE MANCHESTER BUSINESS SCHOOL
General Marking Scheme Guidelines for Undergraduate Courses

90-100% Excellent First
Work that is outstanding in all aspects. Answer is thoroughly independent, original and insightful. Work of
this standard is in the highest range of the class.
80-89% High First
Exemplary work, that is highly accurate, analytical and critical in its approach. Answer demonstrates an
illuminating use of sources and thorough mastery of the subject matter.
75-79% Clear First
Excellent work that is very accurate and fully answers the question set. Answer demonstrates a well-
developed ability to analyse, synthesise and apply relevant knowledge and concepts. Superior
understanding is shown through the use of sources and/or examples to illustrate points and to justify
arguments.
70-74% First
Highly competent work that provides a near-full answer to the question set. Answer is well-structured and
coherent, and demonstrates the ability to identify key issues, analyse and apply knowledge and concepts
effectively. Wider reading and appreciation of the subject matter is evident. Free of all but very minor
errors.
60-69% 2.1
A good piece of work that demonstrates a sound grasp of the subject matter - though possibly lacking the
breadth and depth expected of a mark in the first class range. Most aspects of the question are covered. A
good attempt at analysis, synthesis and application of relevant knowledge and concepts is evident. Work is
competent in most respects, though there may be minor errors. Ideas are expressed with clarity and
coherence.
50-59% 2.2
A fair piece of work, showing an understanding of the key elements of the subject matter – though there
may be some gaps in knowledge or areas of confusion evident. Answer covers the basic ideas of the
question set. There may be some attempt at analysis, synthesis and application of knowledge and concepts
– but this may lack insight or rely too heavily on course materials. Work may contain some errors. Ability to
tackle questions and issues not previously encountered may be limited.
40-49% Third
An adequate piece of work, which demonstrates some familiarity with the subject matter. Answer covers
only the basic requirements of the question. There may be major gaps in knowledge and/or serious
misconceptions. Ideas may be confused or poorly expressed. There is limited evidence of analysis, synthesis
or application of knowledge. Answer demonstrates an inability to address questions and issues not
previously encountered and/or parrots course material.
30-39% Compensatable Fail
Work which marginally fails to reach the standard required for a third class mark at the appropriate level
(40%), but which the examiner(s) would consider it appropriate to condone, provided the necessary
conditions for compensation are present. Answer identifies a number of relevant issues, but fails to show a
grasp of relevant concepts and displays (whether implicitly or explicitly) major gaps in knowledge. Limited
understanding and/or familiarity with the subject matter.
20-29% Outright Fail
Work which fails to reach the standard required of a third class mark at the appropriate level, and which the
examiner(s) would not be prepared to condone. Answer fails to address the question set but may
demonstrate some understanding of the general subject. Contains many significant errors or totally
inadequate in terms of quantity.
10-19% Serious Fail
Answer is largely irrelevant, but may display some knowledge of the general subject. However, a muddled
understanding or major confusion regarding the subject matter is evident.
5-9% Disastrous Fail
No real effort to answer the question. Answer is totally irrelevant or comprises of no more than a few
sentences.
0-4% Abysmal Fail
A blank or near-blank script. A response which entirely fails to address the question.