Unit convenor and teaching staff |
Unit convenor and teaching staff
Unit Convenor / Lecturer
Bernd Luedecke
Contact via Email
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Credit points |
Credit points
2
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Prerequisites |
Prerequisites
(Admission to MAppFin or PGCertAppFin or GradDipAppFin) and (AFCP801 or ECFS865) and ECFS867
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Corequisites |
Corequisites
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Co-badged status |
Co-badged status
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Unit description |
Unit description
This unit addresses the commercially important problem of interest rate risk management in a portfolio context. The unit explains the conceptualisation, measurement, display and modification of the risk characteristics of a portfolio of interest rate sensitive financial instruments. The unit describes the construction/calibration of a zero coupon yield curve using observable market data. This yield curve underpins the valuation and risk management of traded cash flows. Topics include construction of the zero coupon discount function, identification of cash flows, valuing known and contingent cash flows, and sensitivity analysis. Across instrument hedging and basis risk minimisation strategies are discussed.
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Information about important academic dates including deadlines for withdrawing from units are available at https://www.mq.edu.au/study/calendar-of-dates
On successful completion of this unit, you will be able to:
To pass this unit (requires a Standardised Numerical Grade of 50 or better) the student must pass the final examination.
Name | Weighting | Due |
---|---|---|
Pre-Unit Assignment | 15% | First class |
Post-Lectures Assignment | 30% | Refer to iLearn |
Final Examination | 55% | Refer to Timetable |
Due: First class
Weighting: 15%
Individual / Group: Individual
Due Date: Beginning of first class (absolute rock-hard deadline)
Grading Method: Refer to 'Standards Required to Complete the Unit Satisfactorily' section
Submission Method: In class (at beginning of first class)
Duration: Refer to Assignment coversheet
Extension Requests:
Other Information:
Due: Refer to iLearn
Weighting: 30%
Individual / Group: Individual
Due Date: Refer to iLearn
Grading Method: Refer to 'Standards Required to Complete the Unit Satisfactorily' section
Submission Method: Via Turnitin on iLearn
Duration: Refer to Assignment coversheet
Extension Requests:
Other Information:
Due: Refer to Timetable
Weighting: 55%
Individual / Group: Individual
Due Date: Refer to Timetable.
Grading Method: Refer to 'Standards Required to Complete the Unit Satisfactorily' section
Submission Method: As per MAFC Program Rules & Procedures at www.mafc.mq.edu.au
Duration: 2 hours plus 10 minutes reading time
Examination Conditions:
Extension Requests:
Face-to-Face Teaching: Generally 20 hours
Timetable: Detailed timetable for classes are on the Centre’s web site www.mafc.mq.edu.au
Consultation Times:
Students who wish to contact any of the teaching staff may do so through:
Text: Nil
Additional Readings:
Lecture Notes: Available in printed form and electronically via iLearn.
Study Problems: Students are required to work systematically through suggested problem sets. These problems will not be collected but they will help you prepare for the exams. Answers to the problems will be posted on the Unit’s iLearn site.
Pre-Unit Materials: Information papers on statistics, regression, accounting and other material may be found at http://mafcstudents.mq.edu.au/new-to-mafc/pre-course-materials/. Students should work through this material prior to commencing the degree. The material will remain a useful reference as students progress through the program.
Useful References:
Calculators:
Assumed Knowledge: Mathematical content
Solve for Z5:$1,000 = $681.20(1+Z5/2)10
D = - ((1+y) / P) (ΔP/Δy)
Assumed Access: Access to a computer with word processing and spreadsheet capability is assumed, as is general Student computer literacy.
Unit iLearn Site:
Important Notice:
The pre-Unit assignment and a relevant spreadsheet file will be made available for download from the IRPM course forum about 2½ weeks before the lectures. Students should go to http://www.mafc.mq.edu.au/coursewebpages/irpm/downloads.htm to download these.
The pre-Unit assignment represents 15% of the assessment for this Unit. It is due at the start of the very first lecture.
1.1: What you should have learned by doing the pre-unit assignment.
1.2: Introduction to the yield curve -- definition, theory and estimation.
1.3: Valuation: application of discount factors to future cash flows.
1.4: The notion of a traded cash flow.
1.5: Common/Familiar Financial instruments that involve traded cash flows.
1.5.1 Bank bills, certificates of deposit, commercial paper.
1.5.2 Bonds.
1.5.3 Interest rate swaps.
1.5.4 Why aren’t there more longer dated ZC traded cash flows?
1.6: Contingent cash flows.
1.6.1 Swaps.
1.6.2 Options.
1.6.3 Credit risk contingencies.
1.7: Risk management of traded cash flows -- asking and answering a whole bunch of “What if?” questions.
1.8: Bringing it all together -- context and scope of this course.
1.9: The business context.
PE1: Problems and exercises for Topic 1.
ICE1: Points drawn out of the pre-unit assignment.
References:
2.1: Definition and some parameters.
2.1.1 The meaning of the drift coefficient.
2.1.2 The meaning of the standard deviation.
2.1.3 Putting it together thus far.
2.2: Specifications for α(r) and σ(r).
2.2.1 The Rendleman-Bartter model.
2.2.2 The Vasicek model.
2.2.3 The Cox-Ingersoll-Ross (CIR) model.
2.3: Estimation.
2.3.1 Identify the parameters.
2.3.2 Choose a criterion function.
2.3.3 Optimise the criterion.
2.3.4 Class exercise: Estimation.
2.4: Modelling the yield curve.
2.4.1 Regression-type models.
2.4.2 Empirical yield curve models.
2.4.3 Equilibrium models.
2.5: The Black model for pricing bond options and caps.
2.5.1 Class exercise: Using the Black model to price a cap.
2.6: The Black-Derman-Toy (BDT) model.
2.6.1 Class exercise: Implementing a Black-Derman-Toy tree.
2.6.2 Pricing caplets and caps using a BDT tree.
2.6.3 Pricing FRAs using a BDT tree.
2.7: Summary and learnings.
PE2: Problems and exercises for Topic 2.
References:
3.1: What’s observable?
3.2: Discount factors.
3.3: The key connecting relationship -- DFs and par swap rates.
3.4: Interpolation techniques.
3.4.1 Linear interpolation.
3.4.2 Exponential interpolation.
3.4.3 Cubic splining.
3.5: Construction of a “blended” zero-coupon yield curve.
3.5.1 The AUD Money Mkt worksheet.
3.5.2 The AUD Futures worksheet.
3.5.3 The AUD Swaps worksheet.
3.5.4 The AUD Discount Function worksheet.
PE3: Problems and exercises for Topic 3.
ICE3: Topic 3 in-class exercise.
References:
4.1: The net cash flows meet the discount function.
4.2: A sign convention.
4.3: A useful definition -- the accrual factor.
4.4: Valuing the fixed side of an interest rate swap.
4.5: Valuing the floating side of an interest rate swap.
4.6: Bringing the two sides together.
4.7: Revaluation.
4.8: Currency considerations -- a spot FX perspective.
4.9: Cross-currency swaps (CCS) and long dated foreign exchange (LDFX).
PE4: Problems and exercises for Topic 4.
References:
5.1: One TCF has many NPV sensitivities.
5.2: The effect of the passage of time.
5.3: The effect of changes in interest rates -- Delta (𝛥).
5.4: The effect of changes in FX rates.
5.5: The portfolio effect.
PE5: Problems and exercises for Topic 5.
References:
6.1: Basis swaps.
6.2: Amortising swaps.
6.3: Roller coaster swaps.
6.4: Commodity swaps.
6.5: Equity swaps.
6.6: Asset swaps.
6.7: Total return swaps.
6.8: Constant maturity swaps (CMS).
6.9: Overnight index swaps (OIS).
6.10: Delayed reset (= in-arrears, or back-end-reset) swaps.
6.11: Flexibility = “glue”.
6.12: Swaptions.
PE6: Problems and exercises for Topic 6.
ICE6: Topic 6 in-class exercise.
References:
7.1: Basis risk analysis.
7.2: Minimum variance basis hedging.
7.3: The hedging coefficient model.
7.4: Calculating hedging coefficients.
7.5: Stationarity of hedging relationship(s).
PE7: Problems and exercises for Topic 7.
References:
8.1: Where does the next deal come from?
8.2: Are we well managed, prudentially and governance-wise?
8.2.1 Risk limits and impartial enforcement.
8.2.2 Adequate measurement of capital usage and appropriate risk-adjusted return on that.
8.2.3 Internal “contracting” (enforceable?) between the portfolio manager and her/his manager(s).
8.3: Legal considerations.
8.3.1 Has our company signed/executed the required documentation? (e.g., ISDA agreements).
8.3.2 Do you personally have authority to deal, and appropriate training & competence?
8.4: Are we well managed as a business?
8.4.1 A going concern.
8.4.2 Providing for future operations.
8.4.3 Liquidity is crucial.
8.4.4 Dealing lines/limits.
8.4.5 Cash management.
8.4.6 Exiting the business.
PE8: Problems and exercises for Topic 8.
References:
The assignment itself will be handed out in class or made available for downloading from the IRPM unit ilearn site. This assignment comprises 30% of the overall assessment for the IRPM unit.
This examination comprises 55% of the assessment for the IRPM unit.
Macquarie University policies and procedures are accessible from Policy Central. Students should be aware of the following policies in particular with regard to Learning and Teaching:
Academic Honesty Policy http://mq.edu.au/policy/docs/academic_honesty/policy.html
Assessment Policy http://mq.edu.au/policy/docs/assessment/policy.html
Grading Policy http://mq.edu.au/policy/docs/grading/policy.html
Grade Appeal Policy http://mq.edu.au/policy/docs/gradeappeal/policy.html
Grievance Management Policy http://mq.edu.au/policy/docs/grievance_management/policy.html
Disruption to Studies Policy http://www.mq.edu.au/policy/docs/disruption_studies/policy.html The Disruption to Studies Policy is effective from March 3 2014 and replaces the Special Consideration Policy.
In addition, a number of other policies can be found in the Learning and Teaching Category of Policy Central.
Macquarie University students have a responsibility to be familiar with the Student Code of Conduct: https://students.mq.edu.au/support/student_conduct/
Results shown in iLearn, or released directly by your Unit Convenor, are not confirmed as they are subject to final approval by the University. Once approved, final results will be sent to your student email address and will be made available in eStudent. For more information visit ask.mq.edu.au.
Students should also consult the MAFC Program Rules & Procedures found at http://www.mafc.mq.edu.au
Macquarie University provides a range of support services for students. For details, visit http://students.mq.edu.au/support/
Learning Skills (mq.edu.au/learningskills) provides academic writing resources and study strategies to improve your marks and take control of your study.
For all student enquires, please contact studentsupport@mafc.mq.edu.au
Students with a disability are encouraged to contact the Disability Service who can provide appropriate help with any issues that arise during their studies.
Learning Skills (http://www.students.mq.edu.au/support/learning_skills/) provides academic writing resources and study strategies to improve your marks and take control of your study.
For all student enquiries, visit Student Connect at ask.mq.edu.au
For help with University computer systems and technology, visit http://informatics.mq.edu.au/help/.
When using the University's IT, you must adhere to the Acceptable Use Policy. The policy applies to all who connect to the MQ network including students.
Our postgraduates will demonstrate a high standard of discernment and common sense in their professional and personal judgment. They will have the ability to make informed choices and decisions that reflect both the nature of their professional work and their personal perspectives.
This graduate capability is supported by:
Our postgraduates will be capable of utilising and reflecting on prior knowledge and experience, of applying higher level critical thinking skills, and of integrating and synthesising learning and knowledge from a range of sources and environments. A characteristic of this form of thinking is the generation of new, professionally oriented knowledge through personal or group-based critique of practice and theory.
This graduate capability is supported by:
Our postgraduates will be capable of systematic enquiry; able to use research skills to create new knowledge that can be applied to real world issues, or contribute to a field of study or practice to enhance society. They will be capable of creative questioning, problem finding and problem solving.
This graduate capability is supported by:
Our postgraduates will be ethically aware and capable of confident transformative action in relation to their professional responsibilities and the wider community. They will have a sense of connectedness with others and country and have a sense of mutual obligation. They will be able to appreciate the impact of their professional roles for social justice and inclusion related to national and global issues
This graduate capability is supported by:
This Unit Guide may be subject to change. The latest version is on the Centre’s web site www.mafc.mq.edu.au.
Students should read the Unit Guide carefully at the start of semester. It contains important information about the unit. If anything is unclear, please consult one of the unit lecturers.
University Policy on Grading:
Specific Unit Grading:
Grade | Expectation |
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High Distinction | Provides consistent evidence of deep and critical understanding in relation to the learning outcomes. There is substantial originality and insight in identifying, generating and communicating competing arguments, perspectives or problem solving approaches; critical evaluation of problems, their solutions and their implications; creativity in application as appropriate to the discipline. |
Distinction | Provides evidence of integration and evaluation of critical ideas, principles and theories, distinctive insight and ability in applying relevant skills and concepts in relation to learning outcomes. There is demonstration of frequent originality in defining and analysing issues or problems and providing solutions; and the use of means of communication appropriate to the discipline and the audience. |
Credit | Provides evidence of learning that goes beyond replication of content knowledge or skills relevant to the learning outcomes. There is demonstration of substantial understanding of fundamental concepts in the field of study and the ability to apply these concepts in a variety of contexts; convincing argumentation with appropriate coherent justification; communication of ideas fluently and clearly in terms of the conventions of the discipline. |
Pass | Provides sufficient evidence of the achievement of learning outcomes. There is demonstration of understanding and application of fundamental concepts of the field of study; routine argumentation with acceptable justification; communication of information and ideas adequately in terms of the conventions of the discipline. The learning attainment is considered satisfactory or adequate or competent or capable in relation to the specified outcomes. |
Fail | Does not provide evidence of attainment of learning outcomes. There is missing or partial or superficial or faulty understanding and application of the fundamental concepts in the field of study; missing, undeveloped, inappropriate or confusing argumentation; incomplete, confusing or lacking communication of ideas in ways that give little attention to the conventions of the discipline. |
Review of Grade and final examination Script viewing: