COURSE OUTLINE

GIFT BUSINESS SCHOOL

FIN-614/414
Fixed Income and Derivative Analysis
Fall Semester, 2013
Faculty:

GIFT Business School

Credit hours:

Course level:

MBA BF , MSc AF, BBA, BS AF

Campus/Location/Instruction Mode:

GIFT University/On Campus/In Person

Course Instructor:

Faisal Munir
055-111.900.100 (Ext. 133)
faisal@gift.edu.pk

Consultation hours:
Pre-requisite:

FIN-509 Financial Management / Business Finance / Financial

Management 1

Timing
This document was last updated:

Tuesday, October 27, 2015

BRIEF COURSE DESCRIPTION

This course has two modules, fixed income securities and Derivative. First module focuses on the fixedincome markets and basic analytical tools used in analysing fixed income securities. Features of fixedincome securities and credit rating will be covered in detail. Topics on basic analytical tools include interest
rates and yield-curve mathematics, duration analysis and convexity. Theories on the term structure of interest
rates will also be discussed. Second module introduces the concept of derivative pricing based on the idea of
an arbitrage-free market. Basic derivative instruments such as forwards, futures, options, and swaps will be
covered. Valuation models for forwards and the Black-Scholes model for options will be studied. The
difference between forwards and futures will be discussed.

COURSE OBJECTIVES

To appreciate the role of fixed income securities in finance.

To understand the risks associated with investing in fixed income securities
To understand the fundamentals of valuation and interest rate risk
To understand basic models of the term structure of interest rates and their dynamics.
To understand different types of financial derivatives and their global markets,
To understand relationships between futures, options and swaps products,
To examine applications of different types of futures and options for the purposes of speculation,
hedging and risk management and develop a good working knowledge and understanding of
analytical techniques used in valuation and applications of swaps.

LEARNING OUTCOMES
Upon completion of this course, students should

demonstrate knowledge about different in fixed incomes securities;

be able to evaluate option free securities;
demonstrate a knowledge of the regulatory framework for financial derivatives;
demonstrate a knowledge of the operations of derivatives exchanges, and be able to compare and
contrast Exchange Traded and Over The Counter (OTC) instruments;
demonstrate a detailed knowledge of the different types of forwards, futures, swaps, options and
other financial derivatives, the principal differences between them, and where and how they are
traded;
demonstrate the uses of all financial derivatives, either alone, or in conjunction with underlying
assets, to realize investment, hedging and trading objectives;

CONTENTS
Sessions

1-2

3-4

5-6

7-8
9-10

TOPIC
Features of Debt Securities :
Introduction, Indenture and Covenants, Maturity, Par value, Coupon Rate,
Provisions for paying Off Bonds, Conversion Privilege, Put provision,
Currency Denomination, Embedded Options, Borrowing Funds to Purchase
Bonds
Risks Associated with Investing in Bonds:
Introduction, Interest rate risk, Yield curve risk, Call and Prepayment risk,
Liquidity risk, Exchange Rate risk, Inflation and volatility risk, Event risk,
Sovereign risk
Overview of Bond Sectors and Instruments:
Introduction, Sectors of the Bond Market, Sovereign Bonds, SemiGovernment Bonds, State and local Governments, Corporate Debt
securities, Primary market and Secondary Market for Bonds.
Understanding Yield Spreads:
Introduction, Interest rate determination, Yields on Non- Treasury
Securities, U.S. Treasury Rates, Non U.S. Interest rates, Swap Spreads.
Introduction to the Valuation of Debt Securities:

READING

Chapter 1

Chapter 2

Chapter 3

Chapter 4
Chapter 5

Introduction, General
Principles of Valuation, Arbitrage- Free
Valuation Approach, Valuation Models

11-13

14-16
15
17
18-20

21-23

Yield Measures, Spot Rates, and Forward Rates:

Introduction, Sources of Return, Traditional Yield Measures, Theoretical
Spot Rates, Forward Rates
Introduction to the Measurement of Internet Rate Risk:
Introduction, The Full Valuation Approach, Price Volatility Characteristics of
Bonds, Duration, Convexity Adjustment, Price Value of Basis Point,
Importance of Yield Volatility.
MID-TERM EXAM
Deutsche Bank: Finding Relative Value Trade
Forward Markets and Contracts
Introduction, the structure of global markets, types of forward contracts,
pricing and valuation of forward contracts
Case: Jonathan Adams
Future Markets and Contracts
Introduction, Futures trading, the clearinghouse, margins, and price limits,
delivery and cash settlement, future exchange, the structure of global
markets, types of forward contracts, pricing and valuation of forward
contracts

Chapter 6

Chapter 7

Case
Chapter 2

Chapter 3

Options Markets and Contracts

24-27

Basic definitions and illustrations of options contracts, the structure of

global options markets, type of options, principle of options pricing,
discrete-time option pricing, continuous-time option pricing

Chapter 4

Case: Shirley Nolte

SWAP Markets and Contracts
28-30

Introduction, the structure of global swap markets, types of swaps,

pricing and valuation of swaps, variations of swaps

Chapter 5

Case: Trent Black

Please note: This is a proposed schedule only and may be varied at the discretion of the instructor to give a
greater or lesser degree of emphasis to particular topics.
TEXTS AND SUPPORTING MATERIALS
Prescribed Texts and Readings:
1. Fixed Income Analysis by Frank J. Fabozzi, PH.D., CFA
2. Analysis of Derivative for the CFA Program by Chance
Reference Texts:
Fixed Income Markets and Their Derivatives by Suresh Sundaresan
Options, Futures and Other Derivatives by JOHN C.HULL
Internet Resources:
1. See digital library EbscoHost and SpringerLink at http://digitallibrary.edu.pk/giftunigujranwala.html
2. State Bank of Pakistan http://www.sbp.gov.pk/

ASSESSMENT
Item

Assessment Task

Length

Weighting

Due Day and Time

1.

Assignments (4)

10%

Various Weeks in Class

2.

Class Participation

10%

All Sessions

3.

Quizzes (4)

20 Mins

15%

Various Weeks in Class

4.

Mid Term

75 Mins

25%

In Week 8 Class

5.

Final Examination

3 hours

40%

During Formal Examination Period

Students must complete each component of the assessment to the satisfaction of the course instructor, and
achieve an overall mark of at least 50% in order to pass the course. All components of the above
assessment are compulsory, and must be completed in order to obtain a pass grade. Students are expected
to perform satisfactorily in each item.
Assessment Item No. 1 (Assignments)
These individual or group assignments will require students to apply knowledge gained in the course to
selected real life problems and case studies.
Assessment Item No. 2 (Class Participation)
Students should develop habit of studying the designated topic before coming to class as we shall be
following Participatory Centered Learning Approach. Each student will be required to participate in the
class room discussion. Student should come prepared with points relevant to case/article/chapter in
the classroom to effectively participate.
Assessment Item No. 3 (Quizzes)
An unspecified number of quizzes will be given to students in the class during various weeks without any
prior intimation. The duration of the quizzes will be 10 15 minutes. The objective is to test whether the
students are keeping up with the work and grasping the concepts.
Assessment Item No. 4 (Mid-Term Examination)
It is 75 minutes; closed book, application based examination designed to test the students grasp of the
subject through concept testing, scenarios, and mini cases, etc. and to provide students with early
feedback. It will be held in class during week 14 or 15 or the semester.
Assessment Item No. 5 (Final Examination)
It will be 2 3 hours; closed book examination requiring students to answer application based short
questions and mini cases, etc. The final examination will be designed to check the overall grasp of the
subject offered by the students.