Postgraduate Diploma in Banking (Distance Learning)

In this module you will study the main issues in modern corporate finance. The subject ‘corporate finance’ is a well-established discipline, which is concerned with corporations large enough to have issued shares that are ‘quoted’ on a stock market. We must, though, first clarify what we mean by the main issues, for the issues that are important to one person may be viewed as less important by others.

Learning outcomes

When you have completed your study of this module you will be able to:

• describe modern principles of corporate finance and evaluate their validity
• rationalise corporate finance decisions in the light of agency problems and conflict of interest among corporations' stakeholders
• analyse firms' investment decisions
• discuss firms' choice of capital structure and its implications for the value of the firm
• examine and discuss the key issues related to dividend policy and their implications for the value of the firm
• critically assess the reasons behind mergers and acquisitions and their welfare implications.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Hillier D, S Ross, R Westerfield, J Jaffe, & B Jordan (2021) Corporate Finance. 4th Edition. McGraw-Hill Education.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Excel worksheets: Worksheet exercises are available to download on the VLE.
  Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Perspectives on Corporate Finance

• 1.1 Introduction
• 1.2 Core Theories of Corporate Finance
• 1.3 Key Questions in Corporate Finance
• 1.4 The Objective of the Firm
• 1.5 Agency Problems
• 1.6 Conflict between Shareholders and Bondholders
• 1.7 Conclusion

Unit 2 Net Present Value and Capital Budgeting Decisions

• 2.1 Introduction to Capital Budgeting Decisions
• 2.2 Investment Principles and Net Present Value
• 2.3 Capital Budgeting Decisions
• 2.4 Analysing a Project – A Mini Case
• 2.5 Sensitivity and Scenario Analysis

Unit 3 Return, Risk, Portfolio and Asset Pricing Models

• 3.1 Introduction
• 3.2 Expected Return and Risk
• 3.3 How is the Equilibrium Return on Risky Assets Determined? – The Capital Asset Pricing Model
• 3.4 A More General Model: the Arbitrage Pricing Theory (APT)
• 3.5 Conclusion

Unit 4 Issues in Modern Finance: the CAPM, Efficient Market Hypothesis and Behaviour Finance

• 4.1 Introduction
• 4.2 The Use of CAPM for Calculating the Cost of Capital for Risky Projects
• 4.3 Efficient Capital Markets
• 4.4 Weak, Semi-strong and Strong Forms of Efficiency
• 4.5 Anomalies – Are they Meant to be Extinct?
• 4.6 Implications for Corporate Financing Decisions
• 4.7 Conclusion

Unit 5 Dividend Policy

• 5.1 Introduction
• 5.2 Empirical Evidence on Dividend Policy
• 5.3 The Irrelevance of Dividend Policy
• 5.4 Taxes Can Make Dividend Policy Matter
• 5.5 Asymmetric Information and Signalling
• 5.6 Dividend Policy and Agency Costs
• 5.7 Is There an Optimal Dividend Policy?

Unit 6 Capital Structure I

• 6.1 Introduction – How Much Debt Should the Firm Issue?
• 6.2 The Debt-Equity Irrelevance Theorem
• 6.3 Corporate and Personal Taxes
• 6.4 Effects of Bankruptcy Costs
• 6.5 Implications and Limitations of the Trade-off Theory of Optimal Capital Structure
• 6.6 Conclusion

Unit 7 Capital Structure II: Information Asymmetries and Agency Costs

• 7.1 Introduction
• 7.2 Asymmetric Information Explanations of Capital Structure
• 7.3 Minimising the Agency Costs of Equity and Debt
• 7.4 Conclusion

Unit 8 Mergers

• 8.1 Introduction
• 8.2 Merger Gains and the Sources of Gain
• 8.3 Rationale for Mergres to Take Place
• 8.4 Forms of Takeover
• 8.5 Some Stylised Facts about Merger Activity
• 8.6 Review of the Unit's Questions

Module samples

• M421 Module introduction (PDF)
• M421 Specimen examination (PDF)
• M421 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module on Corporate and Investment Banking has three main aims, to:

1. examine the financial needs of companies in relation to corporate and investment banking
2. illustrate the financial services provided by corporate and investment banks and how they support companies in their business
3. analyse the structure and management of corporate and investment banks.

The module examines corporate and investment banking from the point of view of companies that require financial support, and from the perspective of the banks that provide financial solutions. In this way you will develop a broader understanding of how corporate and investment banks operate, the factors that drive the demand for their services, how banks respond to the needs of clients, and how banks develop and maintain their competitiveness.

Learning outcomes

When you have completed this module, you will be able to:

• explain the core elements of corporate and investment banking services, and how these support non-financial firms
• discuss the roles that corporate and investment banks play in the fundraising process of a company
• assess the quality of the capital structure of a company, and discuss a variety of credit solutions
• analyse working capital, money management, and money management strategies
• assess the factors that drive the internationalisation of banking
• discuss the organisation, financial strategy and performance of the largest corporate and investment banks
• discuss the main sources of risk in the financial sector
• explain and develop risk management strategies using simple derivative contracts
• analyse and assess structured finance, including securitisation, credit derivatives, project finance, and mezzanine finance
• explain the steps in an initial public offering, IPO pricing, and the role played by the IPO underwriting syndicate
• discuss the key characteristics of private equity investments
• examine the role of investment banks in mergers and acquisitions.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Arnold G (2014) The Financial Times Guide to Banking. Harlow UK, Pearson Education Ltd.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 The Role of Banks in Corporate Business

• 1.1 Introduction
• 1.2 What is Banking?
• 1.3 Retail banking, Corporate banking and Investment Banking
• 1.4 The Demand for Corporate and Investment Banking
• 1.5 Conclusions

Unit 2 Corporate Banking: Lending

• 2.1 Introduction
• 2.2 Equity, Debt, and the use of Leverage
• 2.3 Optimising Capital Structure
• 2.4 Capital Raising: Debt and Bonds
• 2.5 Corporate Banking and Credit Risk Assessment
• 2.6 Conclusion

Unit 3 Money and Financial Management

• 3.1 Introduction
• 3.2 Production Cycles, Working Capital and Financial Management
• 3.3 Financial Solutions for Working Capital and Money Management
• 3.4 Domestic and Cross-border Payments
• 3.5 Cash Management and Clearing Strategies in Multinational Firms
• 3.6 Conclusion

Unit 4 International Banking

• 4.1 Introduction
• 4.2 Banking across Borders
• 4.3 National Banking Systems
• 4.4 Global Players in Corporate and Investment Banking
• 4.5 Corporate and Investment Banking: Performance and Market Share
• 4.6 Conclusion

Unit 5 Risk Management

• 5.1 Introduction
• 5.2 Risk Management in the Financial Sector
• 5.3 Main Risk Types
• 5.4 Economic and Available Capital
• 5.5 Derivatives Contracts
• 5.6 Conclusion

Unit 6 Structured Finance

• 6.1 Introduction
• 6.2 Structured Finance: Credit and Capital Market Convergence
• 6.3 Securitisation: From Originating-to-hold to Originating-to-distribute
• 6.4 Credit Derivatives
• 6.5 Project Finance
• 6.6 Mezzanine Finance
• 6.7 Conclusion

Unit 7 IPOs, Listing services and Underwriting syndicate

• 7.1 Introduction
• 7.2 Going Public: Why, When and Where?
• 7.3 What Should a Firm’s CEO and its Shareholders know before Going Public?
• 7.4 The Key Steps of the Listing Process
• 7.5 The Structure and Role of IPO Underwriting Syndicates
• 7.6 Assessing the Success of an IPO: the Cases of Facebook and Twitter
• 7.7 Conclusion

Unit 8 M&A, Private equity and Venture Capital

• 8.1 Introduction
• 8.2 Private Equity Investments: Definition, Classification and Types of Firms
• 8.3 The Private Equity Business Model
• 8.4 Mergers and Acquisitions
• 8.5 The Role of Investment Banks in Mergers and Acquisitions
• 8.6 Conclusion

Module samples

• M486 Module introduction (PDF)
• M486 Specimen examination (PDF)
• M486 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module examines the principles and practice of portfolio management, from the perspective of the individual investor, and the professional fund manager employed by an institutional investor, such as a mutual fund, pension fund, or hedge fund. Over a period of decades there has been rapid and far-reaching change in the investments industry. Deregulation and financial liberalisation, and developments in information and communications technology, have contributed to a massive expansion of financial markets and the development of new trading strategies. The downside of these developments was a financial crisis in the late 2000s of a magnitude not seen previously since the 1920s and 1930s. Several of the causes of this crisis can be traced directly to innovations in security design, trading strategies fuelled by leverage, a lack of transparency, and a widespread attitude of complacency towards risk among investors, financial intermediaries, and regulators.

The module uses and discusses several of the most important building blocks of financial economics theory, including the capital asset pricing model and the efficient markets hypothesis. A core principle running through the module is that investment decisions are taken in a context where higher returns can only be earned at a cost of accepting greater risk. To make good investment decisions, the individual or professional investor needs to consider their financial objectives or goals, their time horizons, and their willingness to tolerate risk. The trade-off between reward and risk is a recurring theme. We measure reward as the expected return on a security, and risk is measured using the variance or the standard deviation of returns.

Learning outcomes

When you have completed your study of this module, you will be able to:

• demonstrate knowledge of the types and functions of financial instruments, financial intermediaries and financial markets
• explain the use of Markowitz portfolio theory in constructing an investment portfolio that delivers an investor’s preferred combination of expected return and risk, and assess the limitations of portfolio theory as a practical tool for portfolio optimisation
• identify patterns of trading and asset prices that are inconsistent with the predictions of rational behaviour and the efficient markets hypothesis, and critically evaluate the explanation of these inconsistencies provided by behavioural finance
• explain the main tools of technical analysis and evaluate investment strategies derived from technical analysis
• discuss the distinction between passive and active investment styles, and critically evaluate the usefulness of the Treynor-Black and Black-Litterman models as practical tools for active investment
• assess the applicability of performance measures; attribute investment performance to components deriving from asset allocation, security selection and market timing; and explain the use of style analysis to identify a fund’s investment style.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Bodie Z, A Kane and AJ Marcus (2018) Investments. 11th Edition. McGraw-Hill.
• Module readings: We also provide you with access to academic articles and other reports and material that are assigned as core readings in the Study Guide. You are expected to read them as an essential part of the module. We have selected articles and reports which reinforce your understanding of the material in the Study Guide and textbook, and which also demonstrate how the methods you are studying are applicable and relevant in the investment industry.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Financial Planning, Financial Instruments, Risk and Return

• 1.1 Introduction
• 1.2 Financial Objectives, Time Horizons and Risk Tolerance
• 1.3 Money Market Securities
• 1.4 Bonds
• 1.5 Equity
• 1.6 Derivatives
• 1.7 Property and Commodities
• 1.8 Rates of Interest and Rates of Return
• 1.9 Measuring Reward and Risk
• 1.1 Treasury Bills, Government Bonds and Equities: The Historical Record
• 1.11 Conclusion

Unit 2 Financial Intermediaries and Investment Companies

• 2.1 Introduction
• 2.2 Financial Intermediaries
• 2.3 Types of Investment Company
• 2.4 Specialised Investment Companies and Vehicles
• 2.5 Pension Funds
• 2.6 Conclusion

Unit 3 Stock Markets and Benchmarks

• 3.1 Introduction
• 3.2 Privately-Held and Publicly-Held Companies
• 3.3 Primary Securities Markets
• 3.4 Secondary Securities Markets
• 3.5 Special Types of Transaction on Secondary Markets
• 3.6 The World’s Major Stock Exchanges
• 3.7 Regulation of Financial Markets
• 3.8 Leading Stock Market Indexes
• 3.9 Conclusion

Unit 4 Optimal Portfolio Selection

• 4.1 Introduction
• 4.2 Risk Aversion, and a Risk Adjusted Performance Measure
• 4.3 Probability Distributions for Returns
• 4.4 Portfolio Theory I: Portfolios Containing One or Two Risky Securities
• 4.5 Portfolio Theory II: Optimal Portfolio Selection for Portfolios of Many Risky Securities
• 4.6 Conclusion

Unit 5 Behavioural Finance

• 5.1 Introduction
• 5.2 Formation of Beliefs
• 5.3 Investor Preferences
• 5.4 Limits to Arbitrage
• 5.5 Applications of Behavioural Finance I: Aggregate Stock Market Puzzles
• 5.6 Applications of Behavioural Finance Ii: The Cross-Section of Stock Returns
• 5.7 Critique of Behavioural Finance
• 5.8 Conclusion

Unit 6 Technical Analysis

• 6.1 Introduction
• 6.2 Historical Foundations of Technical Analysis
• 6.3 Tools of Technical Analysis
• 6.4 Technical Trading Rules and Systems Based on Charts and Moving Averages
• 6.5 Evaluation of Technical Analysis
• 6.6 Conclusion

Unit 7 Passive and Active Portfolio Management

• 7.1 Introduction
• 7.2 Strategic and Tactical Asset Allocation
• 7.3 Fundamental Analysis
• 7.4 The Treynor–Black Single Index Model: Introduction
• 7.5 The Treynor–Black Model as a Tool for Portfolio Optimisation
• 7.6 The Black–Litterman Model
• 7.7 Conclusion

Unit 8 The Evaluation of Portfolio Performance

• 8.1 Introduction
• 8.2 Performance Evaluation: The Sharpe, Jensen and Treynor Measures
• 8.3 Performance Evaluation: Other Performance Measures
• 8.4 The Contribution of Market-Timing Ability to Performance
• 8.5 Performance Attribution
• 8.6 Style Analysis
• 8.7 Performance Evaluation for Hedge Funds
• 8.8 Conclusion

Module samples

• M487 Module introduction (PDF)
• M487 Specimen examination (PDF)
• M487 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module has been developed to equip you with the skills and knowledge to manage the financial needs of households. It is intended for professionals and academics, both practicing and aspiring, providing user-friendly technical tools for increased efficiency and effectiveness in your day-to-day professional life. Central to this module are two core issues:

• What are the financial needs of households (both those raised and those neglected due to financial illiteracy or behavioural biases)?
• How could a bank meet these financial needs, and why is it in its interests to do so?

Learning outcomes

When you have completed your study of this module, you will be able to:

• evaluate the role of household characteristics in household portfolio choices
• explain the functions of retail banking products and services
• discuss the principles of retail lending        
• analyse the determinants of mortgage choice
• examine the impact of banking competition on consumer welfare
• discuss the benefits and costs of relationship lending
• explain the main features of private banking products and services. 

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Pond K (2017) Retail Banking. 4th Edition. Hastings UK, Gosbrook Professional Publishing.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Household Wealth and Risk Preferences

• 1.1 Introduction
• 1.2 Household Intangible Wealth
• 1.3 Household Tangible Assets
• 1.4 Household Liabilities and Financial Crises
• 1.5 Household Risk Preferences
• 1.6 Conclusion

Unit 2 Household Portfolio Decisions: Allocation and Rebalancing

• 2.1 Introduction
• 2.2 Household Participation in the Stock Market
• 2.3 Household Portfolio Selection
• 2.4 Household Portfolio Rebalancing
• 2.5 Conclusion

Unit 3 Prospect Theory, Retirement Planning, and Financial Literacy

• 3.1 Introduction
• 3.2 Behavioural Finance and Investor Behaviour
• 3.3 Retirement Planning
• 3.4 Financial Literacy
• 3.5 Conclusion

Unit 4 Retail Banking: Banking Products and Channels

• 4.1 Introduction
• 4.2 Interest-based Products
• 4.3 Non-interest-based Banking Products for Households
• 4.4 Non-interest-based Banking Products for SMEs
• 4.5 Payment Services
• 4.6 Retail Banking Channels
• 4.7 Conclusion

Unit 5 Retail Lending and Household Borrowing

• 5.1 Introduction
• 5.2 Retail Lending
• 5.3 Household Borrowing: Mortgages
• 5.4 Mortgage Refinancing
• 5.5 Strategic Mortgage Default
• 5.6 The Credit Card Debt Puzzle
• 5.7 Conclusion

Unit 6 Retail Banking Competition

• 6.1 Introduction
• 6.2 Models of Competition in Retail Banking
• 6.3 Measuring Competition in Retail Banking
• 6.4 Evidence on Retail Banking Competition
• 6.5 Why Bank Competition Matters
• 6.6 Conclusion

Unit 7 Relationship Lending

• 7.1 Introduction
• 7.2 The Benefit of Long-term Bank-Borrower Relationships
• 7.3 The Cost of Long-term Bank-Borrower Relationships
• 7.4 Hard Information and Soft Information in Loan Pricing
• 7.5 Relationship Banking and Competition
• 7.6 Conclusion

Unit 8 Private Banking

• 8.1 Introduction
• 8.2 Private Banking Clients and Segmentation
• 8.3 Private Banking Products and Services
• 8.4 Tax Considerations
• 8.5 Industry Future and Trends
• 8.6 Conclusion

Module samples

• M488 Module Introduction (PDF)
• M488 Specimen Examination (PDF)
• M488 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to this module on Bank Financial Management. At the outset, it is worth noting that this module has a somewhat more applied feel to it than many other modules in the Master’s and Postgraduate Diploma programme, focusing as it does on the microeconomic problems of financial management of banking firms. This does not mean, however, that the module is devoid of theoretical interest.

Learning outcomes

This module examines the role and importance of bank financial management to the modern bank. It teaches the basic models of financial management taught by University Economics Departments and Business Schools, which were constructed from the experience of mature capitalist economies. The module discusses the various trends shaping banking markets, such as institutionalisation, securitisation, globalisation and concentration.

When you have completed this module, you will be able to:

• discuss trends affecting the whole financial services industry
• assess the implications of change for bank risk management
• outline how the behaviour of banks has been modelled
• identify the risks facing bank financial managers
• explain the need to adapt risk management procedures to an increasingly international financial system
• discuss how interest-rate risk can be managed using hedging activities through the use of financial derivatives and securitization
• explain why funding mix and costs are important to bank management when making loan and investment decisions
• discuss how credit risk and default premiums are assessed and monitored
• analyse the relationship between bank performance and capital adequacy

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Koch TW & SS MacDonald (2015) Bank Management, 8^th Edition, Cengage Learning.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, which is a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Banking Innovations and Risk

• 1.1 Introduction
• 1.2 Bank Management and Bank Financial Management
• 1.3' The good old days': A Simple Balance Sheet View of Banking
• 1.4 The Transformation of Banking – 1970 to 2007
• 1.5 Financial Innovation
• 1.6 Implications of Banking Innovations for Bank Financial Management
• 1.7 An Assessment of Credit Risk Transfer
• 1.8 Conclusion

Unit 2 Bank Accounts: A Useful Tool if Handled with Care

• 2.1 Introduction
• 2.2 The Bank's Balance Sheet: An Introduction
• 2.3 The Bank's Income Statement
• 2.4 Fair Value and Mark-to-Market Accounting: A Hot Topic with Real Potential Effects
• 2.5 Conclusion

Unit 3 Bank Valuation

• 3.1 Introduction
• 3.2 The Functions of Bank Financial Managers
• 3.3 The Risks Facing Bank Financial Managers
• 3.4 The Value of the Banking Firm
• 3.5 The Difference Between Market and Book Value
• 3.6 Performance Analysis Using Financial Ratios
• 3.7 Conclusion

Unit 4 Bank Risk Management – Liquidity Management

• 4.1 Introduction
• 4.2 Bank Risk Management
• 4.3 Concepts of Liquidity and Solvency
• 4.4 Sources of Liquidity
• 4.5 Measuring Banks' Liquidity
• 4.6 Practical Liquidity Management
• 4.7 Payments System Risk and its Potential Impact on Bank Liquidity
• 4.8 Conclusion

Unit 5 Bank Risk Management – Interest Rate Risk Management

• 5.1 Introduction
• 5.2 Interest-Rate Risk Management
• 5.3 GAP Analysis
• 5.4 Duration Analysis
• 5.5 Hedging Interest Rate Risk Off Balance Sheet
• 5.6 Conclusion

Unit 6 Cost of Funds and the Funding of Operations

• 6.1 Introduction
• 6.2 Measuring the Cost of Funds
• 6.3 A Note on the Cost of Capital
• 6.4 Using Cost of Funds Measures
• 6.5 Risks Associated with Raising Funds
• 6.6 Conclusion

Unit 7 Bank Risk Management – Credit Risk

• 7.1 Introduction
• 7.2 Credit Risk
• 7.3 Credit Risk and Default Premiums
• 7.4 Loan Administration: General Procedure
• 7.5 Credit Assessment
• 7.6 Loan Pricing
• 7.7 Problem Loans
• 7.8 Conclusion

Unit 8 Capital Management

• 8.1 Introduction
• 8.2 Basel Accords' Rules and Categories of Bank Capital
• 8.3 Conclusion
• Appendix 8.1 ‘Report for G7 Summit’

Module samples

• M422 Module Introduction (PDF)
• M422 Specimen Examination (PDF)
• M422 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to this module, Bank Regulation and Resolution of Banking Crises. The module has been designed to introduce you to some of the key concepts, principles and practices in modern banking regulation and the resolution of modern banking crises. The literature on these subjects is vast so, in approaching the material, we will focus on a selection of key issues of relevance to the topic.

Learning outcomes

By the end of this module you will be able to:

• explain what is the target and what are the working mechanics of microprudential and macroprudential regulation of banks and other financial intermediaries
• evaluate the purpose and the effects of capital adequacy regulations and their evolution
• contrast crisis prevention measures, such as deposit insurance and Lender of Last Resort, with resolution procedures, such as bail-out and bail-in, especially for globally-operating institutions
• explain how and to which extent shadow banking and offshore financial centres change or outright prevent the working of banking regulation
• evaluate open questions and unresolved issues in international regulation and supervision after the 2008 Financial Crisis.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Reports and textbooks: Allen N Berger, Philip Molyneux & John OS Wilson (2014) The Oxford Handbook of Banking. 2nd Edition, Oxford UK: Oxford University Press.
• Readings:Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Elements and Objectives of Bank Regulation

• 1.1 Introduction
• 1.2 Bank Failures and Banking Crises
• 1.3 Is Bank Regulation Different from Regulating Non-Financial Firms?
• 1.4 Prudential Regulation for a Basic Bank
• 1.5 What is the Purpose of Prudential Regulation?
• 1.6 From the Simple Basic Model toward Actual, Complex Banks
• 1.7 The Global Financial Crisis and what regulators are left to do
• 1.8 Conclusion

Unit 2 International Rules for Prudential Regulation

• 2.1 Introduction – Evolution of Coordinated International Rules
• 2.2 Basel I
• 2.3 Basel II
• 2.4 Basel III
• 2.6 How do changes in regulation generate costs and benefits to the economy?
• 2.7 Conclusion

Unit 3 Financial Stability, Bank Structure and Shadow Banking

• 3.1 Introduction
• 3.2 Commercial Banking and Investment Banking – Joined or Separate?
• 3.3 Shadow Banking – Good for the Banking System or Too Shadowy?
• 3.4 Conclusion

Unit 4 Macroprudential Regulation and Policy

• 4.1 Introduction: Motivation for Macroprudential Regulation (Macropru)
• 4.2 Macroprudential Policies: Why and How
• 4.3 Interactions with Other Policies and International Dimensions
• 4.4 Does it work? Empirical Studies of Macroprudential Policies
• 4.5 Conclusion

Unit 5 Deposit insurance and Lender of Last Resort – Before and After the 2008 Crisis

• 5.1 Introduction
• 5.2 Deposit Insurance
• 5.3 LOLR – Its Origins and Classic Character
• 5.4 The 2008 Crisis and New Role for Central Banks Operating as LOLR
• 5.5 LOLR as the New Monetary Policy
• 5.6 Conclusion

Unit 6 Dealing with Bank Failure: 'Too Big to Fail' and New Resolution Regimes Contents

• 6.1 Introduction
• 6.2 What is Special about the Insolvency of Banks?
• 6.3‘ Too Big to Fail’ and G-SIBs'
• 6.4 Lessons of the 2008 Crisis: The Birth of Bail-in
• 6.5 Conclusion: Bank Resolution, Lessons from the Financial Crisis

Unit 7 The Institutional Structure of Financial Regulation Contents

• 7.1 Introduction
• 7.2 Approaches to Institutional Structure for Financial Regulation
• 7.3 Why is Regulatory Structure Important?
• 7.4 Recent Trends in Regulatory Structure
• 7.5 Regulatory Structure and the Role of the Central Bank
• 7.6 The Fully Unified Approach to Financial Sector Supervision
• 7.7 Two Contrasting Models of Financial Regulation
• 7.8 The UK's Financial Services Authority – Lessons from the 2008 Financial Crisis
• 7.9 Conclusion

Unit 8 Issues in International Supervision and Regulation Contents

• 8.1 Offshore Financial Centres
• 8.2 Regulation, International Institutions, Standards and Codes
• 8.3 On the Political Economy and Ethics of Banking Regulation
• 8.4 Conclusion

Module samples

• M456 Module Introduction (PDF)
• M456 Specimen Examination (PDF)
• M456 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to the Banking Strategy module. The world of banking has changed considerably in recent years, particularly since the crisis of 2007–09. This module aims to give you a good understanding of the characteristics of the financial system and the role of intermediation, as well as the implications of recent structural changes for bank management and external corporate control. You will learn about banks’ sources of funding and how the environment after the 2007–09 crisis transformed their funding choices.

The module also aims to provide an analysis of the factors that can contribute to success or failure in the execution of banks’ mergers and acquisitions (M&A) transactions, and the cultural challenges that may be crucial to the success of an M&A deal involving banks. We hope that your study of the module will enable you to evaluate the business strategy and implementation failings that have given rise to bank failure and to assess the benefits and costs from regulation of the financial services industry, and the net regulatory burden faced by the banking industry.

Learning outcomes

When you have completed your study of this course, you will be able to:

• analyse the particular risks banks are exposed to as a direct result of the intermediation process
• assess the degree to which a bank's strategy may lead to an optimal level of risk, for the bank and for the financial system as a whole
• describe the financial intermediation linkages in a financial system
• analyse patterns of structural change and strategic positioning over cycles of globalisation, deregulation and consolidation
• describe the sources of funding for banks and discuss how they affect banks' profitability and risk
• explain the sources of risk facing banks
• discuss the changing nature of risks facing banks in emerging economies
• explain the causes of the global financial crisis of 2007–09, identifying the features that were unique to this crisis, and those that are common to other crises
• analyse the business models which made some banks especially vulnerable in that crisis
• consider the strategic implications for banks of the regulatory environment.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Smith RC, I Walter & G DeLong (2012) Global Banking. 3rd Edition. Oxford University Press.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Financial Intermediation – Dynamics and Governance Mechanisms

• 1.1 Introduction
• 1.2 Review of Financial Institutions and Systems
• 1.3 Governance Mechanisms
• 1.4 Core Incentive Problems and the Breakdown of Corporate Governance
• 1.5 Case Study
• 1.6 Conclusions

Unit 2 Strategic Drivers of Structural Change in Global Banking

• 2.1 Introduction
• 2.2 Financial Intermediation Dynamics
• 2.3 Structural Change in Global Banking
• 2.4 The Basics of Banking Strategies – A Simple Strategic Schematic
• 2.5 Drivers of Strategic Strengths and Weakness
• 2.6 Case Study
• 2.7 Conclusion

Unit 3 Strategy and Strategic Positioning

• 3.1 Introduction
• 3.2 A Tool for Strategic Thinking – The C-A-P Model
• 3.3 Globalisation, Regulation and Consolidation
• 3.4 Specialist versus Universal Banks
• 3.5 Sources of Competitive Advantage
• 3.6 Strategic Choices
• 3.7 Case Study
• 3.8 Conclusion

Unit 4 Acquisition and Use of Funds

• 4.1 Introduction
• 4.2 Sources of Bank Funding
• 4.3 Disintermediation and Competition from Non-bank Participants
• 4.4 Funding Models Before, During and After the 2007–09 Crisis
• 4.5 Case Study
• 4.6 Conclusion

Unit 5 Banks' International M&A Deals

• 5.1 Introduction
• 5.2 Reasons for M&A Transactions
• 5.3 Consequences of M&A Transactions
• 5.4 Financing M&A Transactions
• 5.5 Case Studies
• 5.6 Feedback on the Case Studies
• 5.7 Conclusion

Unit 6 Managing Bank Risk

• 6.1 Introduction
• 6.2 Risks Facing Banks
• 6.3 Management of Bank Risks
• 6.4 The Changing Nature of the Risks Facing Banks
• 6.5 Case Studies
• 6.6 Feedback on the Case Studies
• 6.7 Conclusions

Unit 7 Business Models and Systemic Risk

• 7.1 Introduction
• 7.2 Financial Crisis
• 7.3 Business Models
• 7.4 Risk Management Lessons from the 2007–09 Financial Crisis
• 7.5 The Future Shape of Banks
• 7.6 Case Studies
• 7.7 Feedback on the Case Studies
• 7.8 Conclusion

Unit 8 Dealing with Regulatory and Compliance Issues

• 8.1 Introduction
• 8.2 Contradictions and Trade-Offs in Regulation
• 8.3 Regulatory Options
• 8.4 Financial and Market Supervision
• 8.5 Regulation after 2007–09
• 8.6 Case Study
• 8.7 Conclusion

Module samples

• M466 Module Introduction (PDF)
• M466 Specimen Examination (PDF)
• M466 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

It is widely recognised by academic economists and policymakers that developed and efficient banking and capital markets are an important prerequisite for economic growth. However, it is also recognised that banking and financial crises can cause abrupt slowdowns or reversals of growth. The drive to understand these phenomena has generated a large body of research, leading to new theories and empirical studies of key features of banking and capital markets. This literature provides the underpinning for the subject material of this module.

Learning outcomes

When you have completed your study of this module, you will be able to:

• explain the functions of financial intermediaries, and evaluate the strengths and weaknesses of bank-oriented and market-oriented financial systems.
• critically evaluate theories of the banking firm which focus on the role of the bank as a provider of liquidity insurance for depositors, and as a delegated monitor of borrowers.
• explain the methods available to a bank to manage credit risk, interest rate risk, market risk and liquidity risk.
• explain why credit markets may fail to clear, and critically evaluate theories of credit rationing and overlending.
• discuss the methods used by shadow banking institutions to raise finance, and the risks to financial stability presented by shadow banking.
• critically evaluate methods for measuring the efficiency of banks, and the intensity of competition in deposits and loans markets.
• explain how a loss of depositor confidence, and asset price bubbles, can trigger banking and financial crises.
• critically evaluate the effectiveness of regulatory arrangements for the banking industry in promoting financial stability.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Matthews K and J Thompson (2014) The Economics of Banking. 3rd Edition. Chichester UK: John Wiley & Sons.
  Freixas X and J-C Rochet (2008) Microeconomics of Banking. 2nd Edition. Cambridge MA: The MIT Press.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Banks and Financial Markets

• 1.1 Introduction
• 1.2 Financial Intermediaries, Financial Markets, and the Flow of Funds
• 1.3 The Financial System and the Flow of Funds
• 1.4 Comparative Financial Systems
• 1.5 Law, Politics and Financial Systems
• 1.6 Bank-oriented versus Market-oriented Financial Systems
• 1.7 Conclusion

Unit 2 Financial Intermediation

• 2.1 Introduction
• 2.2 Principles of Financial Intermediation
• 2.3 Financial Intermediation and Transaction Costs
• 2.4 The Financial Intermediary as a Means of Alleviating Asymmetric Information Problems
• 2.5 The Financial Intermediary as a Liquidity Insurer for Depositors
• 2.6 Conclusion

Unit 3 Risk Management

• 3.1 Introduction
• 3.2 Interest Rate Risk
• 3.3 Market Risk
• 3.4 Credit Risk
• 3.5 Liquidity Risk
• 3.6 Conclusion

Unit 4 Credit Rationing

• 4.1 Introduction
• 4.2 Financial Repression
• 4.3 Credit Rationing due to Adverse Selection: The Stiglitz–Weiss Model
• 4.4 Over-lending
• 4.5 Credit Rationing due to Moral Hazard
• 4.6 Conclusion

Unit 5 Shadow Banking and Securitisation

• 5.1 Introduction
• 5.2 Shadow Banking: Entity-based Classification
• 5.3 Shadow Banking: Activity-based Classification
• 5.4 Traditional Banking and Shadow Banking
• 5.5 The Role of Shadow Banking in the Global Financial Crisis 2007–09
• 5.6 Regulation of Shadow Banking
• 5.7 Conclusion

Unit 6 Competition and Efficiency in Banking Markets

• 6.1 Introduction
• 6.2 The Theory of the Banking Firm
• 6.3 Measures of Competition in Banking
• 6.4 The Structure-Conduct-Performance Paradigm
• 6.5 The New Empirical Industrial Organisation
• 6.6 Measures of Banking Efficiency
• 6.7 Mergers and Acquisitions in Banking
• 6.8 Conclusion

Unit 7 Banking and Financial Crises

• 7.1 Introduction
• 7.2 Bank Runs in the Diamond and Dybvig Model
• 7.3 The Asian Financial Crisis 1997–98
• 7.4 Risk-shifting and Asset Price Bubbles
• 7.5 The Global Financial Crisis 2007–09
• 7.6 Deposit Insurance and Moral Hazard
• 7.7 Conclusion

Unit 8 Bank Regulation

• 8.1 Introduction
• 8.2 Systemic Risk
• 8.3 Lender of Last Resort
• 8.4 Deposit Insurance
• 8.5 Risk-adjusted Capital Adequacy Requirements
• 8.6 Stress Testing
• 8.7 Conclusion

Module samples

• M426 Module introduction (PDF)
• M426 Specimen examination (PDF)
• M426 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module, Corporate Governance, is specially designed for the postgraduate study of such areas as management, finance, financial law, corporate law, economics and related subjects. The module is designed to increase the depth of your understanding of corporate governance issues. As corporate governance is a multi-disciplinary subject – covering such topics as law, politics, management, finance, and economics – you will find that the module will add to previous study of any of these disciplines. A previous knowledge of corporate governance is not required.

Upon successful completion of this module, it is hoped that students with a variety of backgrounds will understand the key elements of corporate governance and its importance to the international economy. In order to achieve this, a strong emphasis is placed on the relationship between theoretical concepts and real world issues. It is therefore hoped that the module can make a real contribution to your in-depth understanding of the relevant corporate governance issues.

Learning outcomes

When you have completed your study of this module you will be able to:

• outline and discuss the key legal, political and economic features of the major corporate governance systems found around the world
• analyse how corporate governance systems influence performance, including both the performance of individual firms and the allocation of capital within a country
• discuss the evolution of diverse ownership and governance structures across different economies
• evaluate theories of the firm, and explain how they are relevant to the diverse range of ownership structures that exist in reality
• address such practical questions, as how should the board of directors and executive teams be composed; how should executives and board of directors be remunerated given the legal, political and economic framework in the country; how do CEOs decide about the mix of debt and equity finance and how does the mix affect their discretion and control over cash flow?
• explain why the quality of corporate governance is relevant to capital formation
• describe why systematic failure of corporate governance can lead to failure of confidence that could spread from individual firms to entire markets or economies
• discuss the role of corporate governance codes and evaluate their usefulness in achieving better corporate governance practices.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Monks RAG & N Minow (2011) Corporate Governance. 5th Edition. New York, Wiley.
  Hansmann H (2000) The Ownership of Enterprises. Cambridge MA, The Belknap Press of Harvard University.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Introduction to Corporate Governance

• 1.1 Introduction
• 1.2 Approaches to Corporate Governance
• 1.3 The Evolution of Corporate Structure
• 1.4 Corporate Governance, Capital Formation, Corporate Finance and Economic Growth
• 1.5 Concluding Remarks

Unit 2 Theory of the Firm

• 2.1 Competition and Cooperation
• 2.2 Market Contracting Costs vs Ownership Costs
• 2.3 Recent Unconventional Developments
• 2.4 More on Complementary Perspectives
• 2.5 Concluding Remarks

Unit 3 Corporate Governance and the Role of Law

• 3.1 The Basic Question in the Debate
• 3.2 Competing Explanations
• 3.3 The Recent Rise of Equity Culture in the EU
• 3.4 A Historical Perspective
• 3.5 Implications for Transition and Developing Economies

Unit 4 Corporate Governance Around the World

• 4.1 A Framework for Comparison
• 4.2 Equity Market-based System vs Bank-led System
• 4.3 Family-based Corporate Governance in Asia
• 4.4 The Pyramid Structure and the Internal Capital Market
• 4.5 Concluding Remarks

Unit 5 Board Composition and Control

• 5.1 Board Composition and Control: Practical and Theoretical Trade-offs
• 5.2 The Typical Anglo-American Board: Past and Present
• 5.3 The Legal Framework Governing the Board
• 5.4 The Board Management Relationship in Reality
• 5.5 Director Selection
• 5.7 Concluding Remarks

Unit 6 CEO Compensation

• 6.1 Introduction: Major Challenges Faced by CEOs
• 6.2 Why CEOs Fail
• 6.3 An 'Ideal' CEO
• 6.4 CEO Compensation and Employment Contract
• 6.5 Stock Options
• 6.6 Case Study: General Electric
• 6.7 Concluding Remarks

Unit 7 International Governance

• 7.1 Corporate Governance has Gone Global
• 7.2 Why Do Companies List Abroad?
• 7.3 Crisis-Driven Reforms in Emerging Markets
• 7.4 Reforms in the Developed World
• 7.5 The Case of Daimler Chrysler
• 7.6 Concluding Remarks

Unit 8 Overview of Corporate Governance Codes

• 8.1 The OECD Principles (1999–2004)
• 8.2 The International Corporate Governance Network (ICGN) Principles
• 8.3 Other Leading International Codes
• 8.4 Reports on the Observance of Standards and Codes
• 8.5 Concluding Remarks

Module samples

• M444 Module Introduction (PDF)
• M444 Specimen Examination (PDF)
• M444 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Econometric Analysis and Applications is the second econometrics module offered to MSc students who need to broaden their understanding of the application of quantitative methods to inquiry in finance or economics. This module assumes that you have studied the classical linear regression model at an introductory level and that you are familiar with the assumptions that underlie that model. You will be aware that there are many cases in which these assumptions are not satisfied, and know how such problems as heteroscedastic disturbances and autocorrelated errors can be detected, and what can be done about them.

The purpose of this module is to broaden your knowledge and extend your understanding of econometrics. In doing this, you will work with data. The first two units extend your knowledge of single equation methods. Unit 1 considers how to make progress with dummy – that is, qualitative – regressors. Unit 2 introduces dynamic models by showing how lags and expectations can be incorporated. The following three units focus on models that consist of two or more equations – simultaneous equation models. The nature of such systems is explained and their identification and estimation discussed. The analysis of dynamic models is extended in Unit 6, where the time series properties of variables are discussed. By understanding the time series properties of variables, you will be able to specify dynamic econometric models that capture both short-run and long-run effects. These are discussed in Unit 7. The final unit, Unit 8, focuses on forecasting with both econometric and time series models.

We recommend that you study Econometric Principles and Data Analysis prior to this module.

Learning outcomes

After studying this module you will be able to:

• explain the use of intercept and slope dummy variables
• use and interpret the Chow test of parameter stability
• explain the nature of the ‘dummy variable trap’ and how to avoid it
• explain finite distributed lag models, including immediate impact, long-run reactions and mean lag
• discuss the properties of estimators of distributed lag and autoregressive models
• implement both Durbin’s h test and the LM test of autocorrelation and interpret the results
• explain ‘simultaneous equation bias’
• interpret in a model the behavioural equations, definitions or identities, and equilibrium conditions
• examine the structural form, reduced form and final form of a simultaneous equation system
• identify conditions for stability in dynamic simultaneous equation systems
• explain the identification problem
• discuss the implications of equations which are exactly identified, overidentified, and not identified
• explain and apply indirect least squares
• explain the method of instrumental variable estimation, and discuss the properties of IV estimators
• explain and apply the method of two stage least squares (TSLS or 2SLS), and discuss the properties of 2SLS estimators
• discuss what is meant by stationary and nonstationary time series, and provide examples of each
• explain and implement the Dickey–Fuller and augmented Dickey–Fuller tests of the hypothesis that a series is I(1)
• explain the nature of cointegration and the relationship between spurious regression and cointegration
• discuss and implement tests of cointegration
• explain, interpret and estimate error correction models
• explain the nature of vector autoregressions (VARs)
• define an autoregressive integrated moving average (ARIMA) model, and use it to forecast
• interpret measures of forecast evaluation.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key text: Jeffrey M Wooldridge (2020) Introductory Econometrics. 7th Edition. Boston MA: Cengage.
• Software: This module will use R. This is a widely used programming environment for data analysis and graphics. You will use this software to do the exercises in the units, and also the data analysis part of your assignments. The results presented in the units are also from R.
• Exercises: There are exercises in every unit. Many of these exercises require you to work with R and data files, available from the VLE, to do your own econometric analysis.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Dummy Variables

• 1.1 Ideas and Issues
• 1.2 The Use of Dummy Variables
• 1.3 The Chow Test for Parameter Stability
• 1.4 Unit Study Guide
• 1.5 Example – Long-Term Trends in Terms of Trade
• 1.6 Conclusion
• 1.7 Exercises
• 1.8 Answers to Exercises

Unit 2 Dynamic Models – Lags and Expectations

• 2.1 Ideas and Issues
• 2.2 Lags
• 2.3 Expectations
• 2.4 Properties of OLS Estimators
• 2.5 Causality – The Granger Test
• 2.6 Unit Study Guide
• 2.7 Example – Long-Term and Short-Term Interest Rates
• 2.8 Conclusion
• 2.9 Exercises
• 2.10 Answers to Exercises

Unit 3 Simultaneous Equation Models

• 3.1 Ideas and Issues
• 3.2 Unit Study Guide
• 3.3 Example – The Polak Model
• 3.4 Conclusion
• 3.5 Exercises
• 3.6 Answers to Exercises

Unit 4 The Identification Problem

• 4.1 Ideas and Issues
• 4.2 Unit Study Guide
• 4.3 Example – Bid–Ask Spreads and Trading Activity in Options
• 4.4 Conclusion
• 4.5 Exercises
• 4.6 Answers to Exercises
• Appendix – Estimates of Moore’s 1914 Model

Unit 5 Simultaneous Equation Models – Estimation

• 5.1 Ideas and Issues
• 5.2 Unit Study Guide
• 5.3 Example – Stock Market Returns and Bond Yields
• 5.4 Conclusion
• 5.5 Exercises
• 5.6 Answers to Exercises

Unit 6 Univariate Time Series – Stationarity and Nonstationarity

• 6.1 Ideas and Issues
• 6.2 Stationary and Nonstationary Time Series
• 6.3 Integrated and Trend Stationary Series
• 6.4 The Nature of Financial Data
• 6.5 Correlograms
• 6.6 Unit Root Tests
• 6.7 Examples – Simulated Series
• 6.8 Example – Exchange rate US$ to UK£
• 6.9 A Procedure for Unit Root Tests
• 6.10 Conclusion
• 6.11 Exercises
• 6.12 Answers to Exercises

Unit 7 Multivariate Time Series Analysis

• 7.1 Ideas and Issues
• 7.2 The Engle–Granger Approach
• 7.3 Error Correction Models
• 7.4 The Johansen Approach
• 7.5 Example – The Single Index Model
• 7.6 Example – UK Financial Markets
• 7.7 Conclusion
• 7.8 Exercises
• 7.9 Answers to Exercises
• Appendix – 0.05 Critical Values: Unit Root and Engle–Granger Cointegration Tests

Unit 8 Forecasting

• 8.1 Ideas and Issues
• 8.2 Example – Forecasting Earnings
• 8.3 Conclusion
• 8.4 Exercises
• 8.5 Answers to Exercises

Disclaimer

Important notice regarding changes to programmes and modules

This module provides an introduction to econometric methods. In brief, the module examines how we can start from relationships suggested by financial and economic theory, formulate those relationships in mathematical and statistical models, estimate those models using sample data, and make statements based on the parameters of the estimated models. The module examines the assumptions that are necessary for the estimators to have desirable properties, and the assumptions necessary for us to make statistical inference based on the estimated models. In addition, the module explores what happens when these assumptions are not satisfied, and what we can do in these circumstances. The module concludes with an examination of model selection.

We recommend that you take this module before progressing onto the more advanced econometrics module Econometric Analysis and Applications.

Learning outcomes

After studying this module you will be able to:

• explain the principles of regression analysis
• discuss the assumptions of the classical normal linear regression model
• explain the method of ordinary least squares
• produce and interpret plots of data
• estimate a regression equation, and interpret the results, for bivariate (two-variable) regression models and multiple regression models
• test hypotheses concerning model parameters
• assess the consequences of multicollinearity
• discuss the consequences of heteroscedasticity for the properties of OLS estimators
• assess the methods used to identify heteroscedasticity, and the various techniques to deal with heteroscedasticity
• discuss the consequences of autocorrelated disturbances for the properties of OLS estimators
• outline and discuss the methods used to identify autocorrelated disturbances, and what can be done about it
• assess the consequences of disturbance terms not being normally distributed, tests for nonnormal disturbances, and methods to deal with non-normal disturbances
• examine the consequences of specifying equations incorrectly
• discuss the tests used to identify correct model specification, and statistical criteria for choosing between models.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Wooldridge JM (2020) Introductory Econometrics. 7^th Edition. Boston MA: Cengage.
• Econometric software: This module will use R. This is a widely used programming environment for data analysis and graphics. You will use this software to do the exercises in the units, and also the data analysis part of your assignments. The results presented in the units are also from R.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 An Introduction to Econometrics and Regression Analysis

• 1.1 What is Econometrics?
• 1.2 How to Use the Module Units
• 1.3I deas – The Concept of Regression
• 1.4 Study Guide
• 1.5 An Example – Efficiency in the Foreign Exchange Market
• 1.6 Conclusion
• 1.7 Working with R
• 1.8 Exercises
• 1.9 Answers to Exercises

Unit 2 The Classical Linear Regression Model

• 2.1 Ideas and Issues
• 2.2 Study Guide
• 2.3 Example – the Single-Index Model (SIM)
• 2.4 Conclusion
• 2.5 Exercises
• 2.6 Answers to Exercises
• Appendix 2.1: Derivation of OLS estimators

Unit 3 Hypothesis Testing

• 3.1 Ideas and Issues
• 3.2 Study Guide
• 3.3 Example – The Capital Asset Pricing Model
• 3.4 Conclusion
• 3.5 Exercises
• 3.6 Answers to Exercises

Unit 4 The Multiple Regression Model

• 4.1 Ideas and Issues
• 4.2 Study Guide
• 4.3 Example – A Multi-index Model
• 4.4 Conclusion
• 4.5 Exercises
• 4.6 Answers to Exercises

Unit 5 Heteroscedasticity

• 5.1 Ideas and Issues
• 5.2 Study Guide
• 5.3 Example – Price-Earnings Ratio
• 5.4 Conclusion
• 5.5 Exercises
• 5.6 Answers to Exercises

Unit 6 Autocorrelation

• 6.1 Ideas and Issues
• 6.2 Study Guide
• 6.3 Example – The Single-Index Model
• 6.4 Conclusion
• 6.5 Exercises
• 6.6 Answers to Exercises

Unit 7 Nonnormal Disturbances

• 7.1 Ideas and Issues
• 7.2 Study Guide
• 7.3 Examples
• 7.4 Conclusion
• 7.5 Exercises
• 7.6 Answers to Exercises
• Appendix 7.1: Small-Sample Critical Values for the Jarque-Bera Test
• Appendix 7.2: Stock Market Indices

Unit 8 Model Selection and Module Summary

• 8.1 Ideas and Issues
• 8.2 Study Guide
• 8.3 Example: Stock Returns
• 8.4 Conclusion
• 8.5 Exercises
• 8.6 Answers to Exercises
• 8.7 Module Summary: ‘What you do and do not know’

Module samples

• M430 Module Introduction (PDF)
• M430 Specimen Examination (PDF)
• M430 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

The starting point for understanding any financial market is that, on a large scale, firms and governments have to turn to institutions (such as banks) and markets (such as bond markets) to finance their core operations. Even if a government or firm currently has no need to borrow or obtain new capital funds, it operates on financial markets to manage its old financial liabilities (such as its outstanding bonds which are traded on markets) or to invest currently surplus funds. At the same time, banks and other financial institutions essentially operate on financial markets as their main business activity.

The fundamental fact underlying this module is that such large players’ financial operations take place on financial markets that are international in character. That is especially true now that, since the 1970s, economies have experienced a fast pace of globalisation. For centuries firms’ and governments’ financial operations have generally involved an international dimension, but modern globalisation has been accompanied by changes in both its scale and its character.

You will study a variety of theories throughout the module, which seek to explain the ways in which finance is handled internationally. One question we want you to keep in mind throughout your study of is: ‘Is the theory true?’ Whatever your answer, your next step should be to consider the related, but different question ‘Is the theory useful?’

Learning outcomes

When you have completed your study of this module you will be able to:

• explain the nature of an exchange rate regime, and assess the future evolution of such regimes
• identify and discuss drivers of the growth of the global foreign exchange market
• explain the nature of exchange rate quotations
• discuss the foreign exchange market microstructure
• interpret balance of payments accounts
• use purchasing power parity measures of gross domestic product (GDP)
• explain the law of one price
• assess the uses of absolute purchasing power parity and relative purchasing power parity
• explain how firms can use currency derivatives to manage risks through hedging
• discuss what determines whether firms do use currency derivatives for hedging
• discuss models and empirical evidence on the difference between the beta coefficient of multinational enterprises as compared with domestic firms
• outline evidence on the connection between agency costs and the capital structure of multinational enterprises
• explain the main features of 'third generation' models of currency crises
• discuss the effects of regulatory regimes on firms' choice of stock exchange for their foreign listings
• explain the differences and relative merits of project finance compared to corporate finance as methods of raising international finance
• compare them with the main features of first and second generation models

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Eiteman DK, AI Stonehill & MH Moffett (2021) Multinational Business Finance. 15th (Global) Edition. Pearson Higher Education.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 The International Context of Finance

• 1.1 Exchange Rate Regimes
• 1.2 Fixed and Floating Exchange Rates
• 1.3 Exchange Rate Regimes – a Bipolar Future?
• 1.4 Recent Examples of Hard Pegs and Intermediate Regimes
• 1.5 A New Bretton Woods System?
• 1.6 Conclusion

Unit 2 The Markets for Foreign Exchange

• 2.1 A Global Twenty-Four-Hour Market
• 2.2 The Mechanics of the Foreign Exchange Market
• 2.3 Hedging Techniques
• 2.4 Market Microstructure
• 2.5 Conclusion

Unit 3 Exchange Rates and Prices

• 3.1 Introduction
• 3.2 The Balance of Payments
• 3.3 A Standard for Measuring Economies
• 3.4 Purchasing Power Parity Theory
• 3.5 The Big Mac Measure
• 3.6 Empirical Evidence – Short-Run Deviations from Purchasing Power Parity
• 3.7 Conclusion

Unit 4 Exchange Rates and Interest Rates

• 4.1 Introduction
• 4.2 Interest Rates and Exchange Rates
• 4.3 Interest Rate Parity
• 4.4 Conclusion

Unit 5 Managing Foreign Exchange Exposure

• 5.1 Introduction
• 5.2 Types of Risk Exposures and Their Management
• 5.3 Financial Firms' Management of Currency Exposure
• 5.4 Empirical Studies on Currency Hedging
• 5.5 Conclusion

Unit 6 International Corporate Finance and Project Finance

• 6.1 Introduction
• 6.2 Corporate Finance – Going International
• 6.3 Corporate Finance – International Equity Markets
• 6.4 International Bond Issues
• 6.5 How Diversification Affects Firms' Financial Needs
• 6.6 More Reading and a Conclusion

Unit 7 Capital Structure and Cost of Capital in International Financing

• 7.1 Introduction
• 7.2 How International Financing Affects Firms' Costs
• 7.3 Does Localisation Matter?
• 7.4 Conclusion

Unit 8 Tax Policies of Multinationals

• 8.1 Introduction
• 8.2 International Tax Environment
• 8.3 T ax Arbitrage
• 8.4 Conclusion

Module samples

• M442 Module Introduction (PDF)
• M442 Specimen Examination (PDF)
• M442 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to the module on Financial Econometrics. The first objective of this module is to introduce the main econometric methods and techniques used in the analysis of issues related to finance. A module with the title Financial Econometrics assumes that such a field exists.

In this module, we define financial econometrics as ‘the application of statistical techniques to problems in finance’. Although econometrics is often associated with analysing economics problems such as economic growth, consumption and investment, the applications in the areas of finance have grown rapidly in the last few decades.

Before starting this module, we recommend that you first complete the modules Econometric Principles and Data Analysis and Econometric Analysis and Applications.

Learning outcomes

By the end of this module you will be able to:

• define and compute measures of financial returns
• interpret sample moments of financial returns
• discuss the stylised statistical properties of asset returns
• formulate models using matrix notation
• derive the OLS estimators using matrix algebra
• use matrix algebra to analyse sources of variation of risk
• explain the principles of maximum likelihood estimation
• derive the maximum likelihood estimators and discuss their properties
• use maximum likelihood estimation, and apply the hypothesis tests available under maximum likelihood estimation
• analyse and estimate models of autoregressive, moving average, and autoregressive-moving average models
• forecast using AR, MA, and ARMA models
• apply the Box-Jenkins approach to time series models
• model and forecast volatility using autoregressive conditional heteroscedastic (ARCH) models
• estimate, interpret, and forecast with generalised autoregressive conditional heteroscedastic (GARCH) models
• extend GARCH models to analyse the asymmetric effect of shocks on volatility
• construct, estimate and interpret multivariate GARCH models
• test for spill-over of volatility between assets
• use vector autoregressive (VAR) models to analyse and interpret interaction between financial variables
• examine the impact of shocks on financial variables using impulse response analysis
• undertake tests of hypotheses and Granger causality in a VAR framework
• formulate limited dependent variable models, including logit and probit models
• estimate and interpret logit and probit models
• discuss models with multinomial linear dependent variables.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Brooks C (2019) Introductory Econometrics for Finance. 4th Edition. Cambridge UK: Cambridge University Press.
• Econometric software: This module will use R. This is a widely used programming environment for data analysis and graphics. You will use this software to do the exercises in the units. The results presented in the units are also from R.
• Readings: You will receive access to a selection of key academic articles which apply the techniques studied in the module to financial data.
• Virtual learning environment:  You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Statistical Properties of Financial Returns

• 1.1 Introduction
• 1.2 Calculation of Asset Returns
• 1.3 Stylised Facts about Financial Returns
• 1.4 Distribution of Asset Returns
• 1.5 Time Dependency
• 1.6 Linear Dependency across Asset Returns

Unit 2 Matrix Algebra, Regression and Applications in Finance

• 2.1 Introduction
• 2.2 Matrix Algebra: Some Basic Concepts and Applications
• 2.3 OLS Regression Using Matrix Algebra
• 2.4 Applications to Finance

Unit 3 Maximum Likelihood Estimation

• 3.1 Introduction
• 3.2 The Maximum Likelihood Function: Some Basic Ideas and Examples
• 3.3 The Maximum Likelihood Method: Mathematical Derivation
• 3.4 The Information Matrix
• 3.5 Usefulness and Limitations of the Maximum Likelihood Estimator
• 3.6 Hypothesis Testing

Unit 4 Univariate Time Series and Applications to Finance

• 4.1 Introduction
• 4.2 The Lag Operator
• 4.3 Some Key Concepts
• 4.4 Wold's Decomposition Theory (Optional section)
• 4.5 Properties of AR Processes
• 4.6 Properties of Moving Average Processes
• 4.7 Autoregressive Moving Average (ARMA) Processes
• 4.8 The Box-Jenkins Approach
• 4.9 Example: A Model of Stock Returns
• 4.10 Conclusions

Unit 5 Modelling Volatility – Conditional Heteroscedastic Models

• 5.1 Introduction
• 5.2 ARCH Models
• 5.3 GARCH Models
• 5.4 Estimation of GARCH Models
• 5.5 Forecasting with GARCH Model
• 5.6 Asymmetric GARCH Models
• 5.7 The GARCH-in-Mean Model
• 5.8 Conclusions

Unit 6 Modelling Volatility and Correlations – Multivariate GARCH Models

• 6.1 Introduction
• 6.2 Multivariate GARCH Models
• 6.3 The VECH Model
• 6.4 The Diagonal VECH Model
• 6.5 The BEKK Model
• 6.6 The Constant Correlation Model
• 6.7 The Dynamic Correlation Model
• 6.8 Estimation of a Multivariate Model

Unit 7 Vector Autoregressive Models

• 7.1 Introduction
• 7.2 Vector Autoregressive Models
• 7.3 Issues in VAR
• 7.4 Hypothesis Testing in VAR
• 7.5 Example: Money Supply, Inflation and Interest Rate

Unit 8 Limited Dependent Variable Models

• 8.1 Introduction
• 8.2 The Linear Probability Model
• 8.3 The Logit Model
• 8.4 The Probit Model
• 8.5 Estimation using Maximum Likelihood
• 8.6 Goodness of Fit Measures
• 8.7 Example: Dividends, Growth and Profits
• 8.8 Multinomial Linear Dependent Variables
• 8.9 Ordered Response Linear Dependent Variable Models (optional section)

Module samples

• M459 Module introduction (PDF)
• M459 Specimen examination (PDF)
• M459 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to this module on Financial Engineering. The module provides an introduction to the analysis of derivatives in financial markets. You will learn the main features of the most commonly used financial derivatives, and you will understand how to use them for the management of risk.

These units explain and discuss the theoretical models that are used to analyse derivatives, and you will also see how derivatives are used in practice. You will study spreadsheet models of derivatives, analysing the performance and valuation of derivatives contracts and trading strategies, starting with the simplest options, and extending to more complex strategies and derivatives contracts. These spreadsheet models will help you to develop a deeper and stronger understanding of derivatives and how they work.

This module focuses on the conceptual and analytical aspects of derivatives. After studying this module, you will be able to understand the main characteristics of derivatives, the potential for using derivatives to manage risk, and you should be able to avoid some of the more serious misunderstandings and mistakes associated with using derivatives. The module is not a substitute for the professional expertise that can only be acquired by directly working in financial markets. But you will find that a solid grounding in the principles of derivatives will enable you to understand much better the practical aspects of derivatives investment and risk management.

The module is concerned with financial engineering as the application of statistical and mathematical methods to analyse and use derivatives in financial markets. The term ‘financial engineering’ also refers to the manipulation of the capital structure of a company to attempt to increase shareholder value. Financial engineering in relation to capital structure is studied in the CeFiMS modules Corporate Finance and Introduction to Valuation.

Learning outcomes

When you have completed your study of this module, you will be able to:

• analyse advanced derivative trading strategies for hedging and speculation
• understand the Black–Scholes–Merton model and its applications
• calculate delta and other measures of sensitivity
• discuss volatility, and strategies for trading volatility
• assess the role of credit derivatives in risk management
• apply advanced numerical techniques for valuing complex options
• construct and use spreadsheet models to analyse derivatives.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Hull JC (2018) Options, Futures, and Other Derivatives. 9th Edition. Harlow UK: Pearson Education.
  Benninga S (2014) Financial Modeling. 4th Edition. Cambridge MA: The MIT Press.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Derivatives Contracts

• 1.1 Introduction
• 1.2 Forward Contracts
• 1.3 Futures Contracts
• 1.4 Options
• 1.5 Types of Traders
• 1.6A ‘Health Warning’
• 1.7 Application: Data tables
• 1.8 Conclusion
• 1.9 Solutions to Exercises

Unit 2 Properties of Stock Options

• 2.1 Introduction
• 2.2 Options
• 2.3 Stock Options
• 2.4 Warrants, Employee Stock Options and Convertibles
• 2.5 Basics of Pricing Stock Options
• 2.6 Trading Strategies Involving Options
• 2.7 Application: Profit Patterns for Options and Option Strategies
• 2.8 Conclusion
• 2.9 Solutions to Exercises

Unit 3 The Behaviour of the Stock Price and the Black–Scholes–Merton Model

• 3.1 Introduction
• 3.2 The Wiener Process
• 3.3 The Behaviour of Stock Prices
• 3.4 Itô’s Lemma
• 3.5 The Lognormal Property of Stock Prices
• 3.6 The Black–Scholes–Merton Equation and the Black–Scholes–Merton Formula
• 3.7 Application 1: Simulating a lognormal process
• 3.8 Application 2: Black–Scholes–Merton option pricing
• 3.9 Conclusion
• 3.10 Solutions to Exercises

Unit 4 Greek Letters and Trading Strategies

• 4.1 Introduction
• 4.2 Naked and Covered Positions
• 4.3 Delta Δ Hedging
• 4.4 Theta Θ
• 4.5 Gamma Γ
• 4.6 Vega v
• 4.7 Rho Ρ
• 4.8 Hedging and Portfolio Insurance
• 4.9 Application 1: Delta Hedging a Call
• 4.10 Application 2: VBA Code for Option Pricing and the Greeks
• 4.11 Conclusion
• 4.12 Solutions to Exercises

Unit 5 Volatility

• 5.1 Introduction
• 5.2 Implied Volatility
• 5.3 Volatility Smiles
• 5.4 Trading Volatility
• 5.5 Application 1: Computing implied volatility
• 5.6 Application 2: Options strategies
• 5.7 Conclusion
• 5.8 Solutions to Exercises

Unit 6 Credit Derivatives and Credit Risk

• 6.1 Introduction
• 6.2 Credit Ratings and Default Probabilities
• 6.3 Mitigation of Credit Risk and Default Correlation
• 6.4 Credit Default Swaps
• 6.5 Asset-Backed Securities and Collateralised Debt Obligations
• 6.6 Correlation and the Gaussian Copula
• 6.7 Application: Calculating Default-adjusted Expected Bond Returns
• 6.8 Conclusion
• 6.9 Solutions to Exercises

Unit 7 Further Numerical Procedures

• 7.1 Introduction
• 7.2 Binomial Trees
• 7.3 Alternative Procedures for Constructing Trees
• 7.4 Monte Carlo Simulations
• 7.5 Finite Difference Methods
• 7.6 Alternatives to Black–Scholes–Merton
• 7.7 Stochastic Volatility Models
• 7.8 American Options
• 7.9 Application 1: Binomial Trees
• 7.10 Application 2: Pricing a Simple Call Option Using Monte Carlo Methods
• 7.11 Conclusion
• 7.12 Solutions to Exercises

Unit 8 Some Exotic Options

• 8.1 Introduction
• 8.2 Exotic Options
• 8.3 Barrier, Binary and Lookback Options
• 8.4 Asian Options
• 8.5 Some Other Exotic Options
• 8.6 Weather and Energy Derivatives
• 8.7 Insurance Derivatives
• 8.8 Application 1: Asian Options
• 8.9 Application 2: Barrier Options
• 8.10 Conclusion
• 8.11 Solutions to Exercises

Module samples

• M482 Module Introduction (PDF)
• M482 Specimen Examination (PDF)
• M482 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

The emergence of an open, liberal international financial order has been one of most notable developments in the global economy in the last 20 years. The growth of a more open international economy since the Second World War produced an international environment in which markets have bypassed national regulations, and financial flows have seriously questioned the Keynesian demand management policies. The study of trade and production cannot, therefore, satisfactorily explain the behaviour of the international economy; finance and the institutions through which it flows should also be examined. In a world where consumption, production and investment are globalised, international finance has become an integral part of any serious academic study of international economics.

The main objective of this module is to study the economists' perspective on international finance, which is a policy-oriented perspective. The examination of the institutions of international finance and the key policy problems that have arisen in recent decades are the main concern of this module. In other words, it is the perspective that an economist would use when advising governments on how to work within the modern international financial system and how to overcome its problems.

Learning outcomes

When you have completed this module, you will be able to do the following:

• outline the decline of Bretton Woods and the rise of the Flexible Exchange Rate Regime, 1973 to the present
• analyse and discuss fixed versus flexible exchange rate regimes
• explain the difference between hedging, arbitrage and speculation and the interaction of hedgers, arbitrageurs and speculators
• discuss the parity relationships between spot and future exchange rates
• demonstrate how a balance of payments is constructed with a series of transactions, and show how transactions are recorded
• explain how the national income framework and elasticities framework can be linked to the absorption framework
• discuss the policy problem the Mundell-Fleming model is designed to address, and the historical circumstances that made it relevant
• differentiate between the assumptions of the Polak model and those of the Mundell-Fleming model
• assess the strengths and weaknesses of the monetary approach
• relate the traditional arguments for and against fixed and floating exchange rates
• explain the rationale behind discretionary intervention in the foreign exchange market
• give an account of the development of the European Monetary System and the European Monetary Union.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Pilbeam, K (2013) International Finance, 4^th Edition, Macmillan.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Evolution of International Financial Systems

• 1.1 Introduction to Unit 1
• 1.2 Bimetallism – before 1879
• 1.3 Classical Gold Standard – 1879–1914
• 1.4 The Interwar Period – 1914–1944
• 1.5 The Bretton Woods System – 1945–1972
• 1.6 The Flexible Exchange Rate Regime – 1973 Onwards
• 1.7 The Rise of the Eurodollar
• 1.8 The International Debt Crisis
• 1.9 Summary

Unit 2 Foreign Exchange Markets

• 2.1 Introduction
• 2.2 Economic Models and Institutions
• 2.3 Market Institutions and Exchange Rates
• 2.4 A Simple Model of the Spot Exchange Rate
• 2.5 A Theory of Spot Exchange Rates: Purchasing Power Parity
• 2.6 Forward and Spot Exchange Rates: Covered Interest Parity
• 2.7 Parity Conditions Linking Spot and Forward Exchange Markets
• 2.8 Foreign Exchange and Other Financial Markets

Unit 3 The Balance of Payments

• 3.1 Introduction
• 3.2 Measures of the Balance of Payments
• 3.3 The Multiplier Approach
• 3.4 The Elasticities Approach
• 3.5 The Absorption Approach
• 3.6 Summary

Unit 4 Balance of Payments: the Mundell-Fleming Approach

• 4.1 Introduction
• 4.2 The Internal-and-External-Equilibrium Approach to Policy
• 4.3 The Mundell-Fleming Approach: the IS-LM-BP Model
• 4.4 Policies and Events: Shifts of the Three Curves
• 4.5 Policies under Fixed and Floating Exchange Rates
• 4.6 Perfect Capital Mobility
• 4.7 Evaluations of the Mundell-Fleming Model
• 4.8 Evaluation of Perfect Capital Mobility

Unit 5 Balance of Payments – the Monetary Approach

• 5.1 Introduction
• 5.2 Background to the Monetary Approach
• 5.3 Three Assumptions of the Monetarist Theory
• 5.4 The Money Supply Identity
• 5.5 Monetarist Analysis of the Balance of Payments
• 5.6 Evaluation of the Monetary Approach
• 5.7 Conclusion

Unit 6 Fixed and Flexible Exchange Rate Systems

• 6.1 Introduction
• 6.2 The Case for Fixed Exchange Rates
• 6.3 The Case for Floating Exchange Rates
• 6.4 The Modern Evaluation of Fixed and Flexible Exchange Rate Regimes
• 6.5 The Case for Managed Exchange Rates
• 6.6 Finance and the Choice of Exchange Rate Systems

Unit 7 Currency Blocs, Financial Integration and International Co-ordination

• 7.1 Introduction
• 7.2 Types of Financial Co-operation
• 7.3 Macroeconomic Policy Co-ordination
• 7.4 European Monetary Union

Unit 8 Currency and Financial Crises and the International Financial System

• 8.1 Introduction
• 8.2 Modelling Currency Crises
• 8.3 The East Asian Financial Crisis
• 8.4 The 2007–08 Financial Crisis
• 8.5 Financial Innovations before the Credit Crunch
• 8.6 Dimensions and Causes of the Credit Crunch
• 8.7 Policy Responses to the 2007–08 Crisis

Module samples

• M429 Module Introduction (PDF)
• M429 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module introduces concepts and tools for valuing companies in a consistent manner. You should find it useful as a starting point and guide for analysing the performance of companies and industries of your interest, and for interpreting and assessing valuations.

The module should be useful for practitioners working in various market environments – from developed countries to emerging markets, from services to manufacturing industries, and from the viewpoints of managers to the desks of stock analysts.

Learning outcomes

When you have completed this module and its readings, you will be able to do the following:

• discuss the importance of value to the performance of companies and economies, and differentiate between activities that create value and those that do not
• explain how to calculate the Return On Invested Capital (ROIC), why a high ROIC can be sustained by a competitive advantage, and the role of pricing advantages and cost advantages in value creation
• provide a proper assessment and organisation of financial statements
• analyse ROIC and revenue growth and assess the financial health of a company with respect to its ability to take on short-term and long-term projects
• denote the properties of WACC, how to estimate it, and alternative ways to calculate its components, and its limitations
• provide a verification of valuation results and sensitivity analysis which helps confirm the value drivers of a company under a broad set of conditions
• identify the economic fundamentals of value – the return on invested capital and expected revenue growth
• explain what is meant by behavioural finance, distinguish between informed investors and noise traders and discuss the main managerial implications of market efficiency.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Koller T, M Goedhart & D Wessels (2015) Valuation: Measuring and Managing the Value of Companies, 6^th (University) Edition, McKinsey & Company.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Virtual learning environment: You will have access to the VLE, a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Foundations of Value Creation

• 1.1 Introduction
• 1.2 Why Study 'Value'?
• 1.3 Growth and Return on Invested Capital (ROIC)
• 1.4 The Conservation of Value
• 1.5 Risk and Value Creation
• 1.6 The Maths of Value Creation
• 1.7 Expectations and Why Shareholder Expectations Become a Treadmill
• 1.8 Decomposing TRS
• 1.9 Conclusion

Unit 2 Sources of Value Creation

• 2.1 Introduction
• 2.2 Drivers of Return on Invested Capital
• 2.3 Competitive Advantage
• 2.4 The Sustainability of ROIC
• 2.5 Drivers of Revenue Growth
• 2.6 Growth and Value Creation
• 2.7 The Difficulty of Sustaining Growth
• 2.8 Conclusion

Unit 3 Framework and Organisation of Valuation

• 3.1 Introduction
• 3.2 Enterprise Discounted Cash Flow Model
• 3.3 Economic-Profit-Based Valuation Models
• 3.4 Adjusted Present Value Model
• 3.5 Reorganising the Accounting Statements
• 3.6 Conclusion

Unit 4 Performance Analysis

• 4.1 Introduction
• 4.2 Analysing ROIC
• 4.3 Analysing Growth
• 4.4 Credit Health and Capital Structure
• 4.5 Mechanics of Forecasting
• 4.6 Additional Issues regarding Forecasting
• 4.7 Continuing Value: DCF Valuation
• 4.8 Continuing Value: Economic-Profit Valuation
• 4.9 Common Pitfalls and Limitations of Forecasting
• 4.10 Conclusion

Unit 5 Cost of Capital and Value per Share

• 5.1 Introduction
• 5.2 Weighted Average Cost of Capital
• 5.3 Estimating the Cost of Equity
• 5.4 Estimating the After-Tax Cost of Debt
• 5.5 Using Target Weights to Determine the Cost of Capital
• 5.6 Valuing Non-Operating Assets
• 5.7 Valuing Debt and Debt Equivalents
• 5.8 Valuing Hybrid Securities and Minority Interests
• 5.9 Conclusion

Unit 6 Reporting Results

• 6.1 Introduction
• 6.2 Verifying Results
• 6.3 Sensitivity Analysis
• 6.4 Creating Scenarios
• 6.5 Valuation by Parts
• 6.6 Using the Multiples
• 6.7 Using the Peer Group
• 6.8 Alternative Multiples
• 6.9 Conclusion

Unit 7 Market Value

• 7.1 Introduction
• 7.2 The Role of Economic Fundamentals
• 7.3 Market Valuation Levels – Return on Invested Capital and Growth
• 7.4 Expectations and Returns to Shareholders
• 7.5 Do Earnings Matter over Cash Flows?
• 7.6 Technical Trading Factors and Stock Market Values
• 7.7 Conclusions

Unit 8 Agents and Efficient Markets

• 8.1 Introduction
• 8.2 Company Mispricing
• 8.3 Market Mispricing
• 8.4 The Role of Investors
• 8.5 Further Challenges of Behavioural Finance
• 8.6 Market Efficiency – Managerial Implications
• 8.7 Conclusions
• 8.8 Module Summary – ‘What you have and have not studied’

Module samples

• M464 Module Introduction (PDF)
• M464 Specimen Examination (PDF)
• M464 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

This module, Macroeconomic Policy and Financial Markets, is specially constructed for postgraduates studying finance and related subjects. The module is designed to increase the depth of your understanding whether or not you have studied economics or macroeconomics previously. Although it does not require previous study of macroeconomics, if you have studied macroeconomics at undergraduate level, this module adds to your knowledge because, unlike other modules, we focus on the relation financial markets have to macroeconomics.

Our intention is that after successfully completing the module, students from varied backgrounds will understand the key elements of macroeconomics and their connection with financial markets. We place the subject in a real-world context, aiming to show how theoretical and empirical knowledge of macroeconomics and financial markets provides ways to analyse the salient problems faced by modern macroeconomic policy makers.

Learning outcomes

When you have completed your study of this module, you will be able to:

• outline and discuss the connection between financial markets, real saving by households, and real investment by firms
• analyse how monetary policy can affect real macroeconomic activity through its interaction with financial markets
• explain the relation between financial markets and governments' fiscal policies
• discuss the effect that expectations of future inflation and interest rates can have on macroeconomic policy and financial markets
• analyse the connection between foreign exchange markets, imports and exports
• examine the possibility of instability arising from interaction between international capital flows and financial markets
• evaluate theories in the light of empirical evidence
• use theory and evidence to analyse actual problems facing macroeconomic policy makers.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Miles, D, A Scott & F Breedon (2012) Macroeconomics: Understanding the Global Economy, 3^rd Edition, Wiley.
• Readings: Throughout the module you will be directed to study a selection of readings, including journal articles, book extracts and case studies that are of particular relevance and interest to the topics covered in the module.
• Video: You will also have access to video content on the VLE, in which leading policy-makers talk to CeFiMS about their experiences. All the decision makers and advisers in the video have dealt with difficult macroeconomic problems in a range of countries and they explain how they approached the problem and considered alternative policies.
  They include:
  • Paul Volcker, looking back on his experience as Chairman of the Federal Reserve
  • Sir Alan Budd, as Economic Adviser in the British Treasury (Ministry of Finance)
  • Guillermo Ortiz, as the Governor of Mexico's central bank
  • Professor Lord Richard Layard, as advisor to the Russian government
  • Benno Ndulu, of the World Bank
  • Professor Rudiger Dornbusch, on experience of Latin American macroeconomic policy
  • Professor Sakakibura, on Japan's recent policy problems
    The interviews were recorded by CeFiMS for the International Monetary Fund and designed for officials studying macroeconomics with the IMF Institute. They are reproduced here with kind permission of the IMF. They show case studies intended to enable students to link their study of principles to actual macroeconomic policy making in the complex real world.
• Virtual learning environment: You will have access to the VLE, web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Macroeconomics and the World of Finance

• 1.1 Introduction
• 1.2 Getting Macroeconomics in Perspective
• 1.3 Long-Run and Short-Run Macroeconomics
• 1.4 Aggregate Demand and National Income Accounts
• 1.5 Alternative Windows on Macroeconomics
• 1.6 Macroeconomics and Financial Markets
• 1.7 Macroeconomics and Finance in Subsequent Units

Unit 2 Saving and Finance

• 2.1 Introduction: Real and Financial Saving
• 2.2 Life Cycle Theory of Saving
• 2.3 Flow of Savings to Financial Markets – Demographic Fundamentals
• 2.4 Impact of Financial Markets on Saving – Interest Rate Effect
• 2.5 Impact of Financial Markets on Saving – Wealth Effect

Unit 3 Investment and Financial Markets

• 3.1 Capital Accumulation
• 3.2 Interest Rates and Investment – the Basic Model
• 3.3 Beyond the Basic Model
• 3.4 Investment and the Stock Market
• 3.5 Financing Hierarchy and the Role of Internal Funds
• 3.6 Conclusion – Investment and Monetary Policy

Unit 4 Monetary Policy and the Central Bank

• 4.1 Central Banks and Macroeconomic Policy – Inflation Targeting
• 4.2 Policy's Intermediate Targets – Money Supply and Interest Rate
• 4.3 Taylor Rules
• 4.4 Transmission Mechanisms of Monetary Policy
• 4.5 Monetary Policy in Context

Unit 5 Fiscal Policy and Government Finances

• 5.1 Effects of Fiscal Policy – Aggregate Demand and Financial Markets
• 5.2 Fiscal Policy and Monetary Policy
• 5.3 Fiscal Policy and the Sustainability of Debt Financing
• 5.4 Fiscal Policy in Perspective

Unit 6 Expectations, Inflation, and Interest Rates

• 6.1 Markets Reflect the Expected Future Today
• 6.2 Macroeconomic Expectations and Financial Markets
• 6.3 Inflation Expectations and the Inflation Output Trade Off

Unit 7 Foreign Exchange Markets and Foreign Trade

• 7.1 Foreign Exchange Markets and the Economy
• 7.2 Case Study – China's Macroeconomic Policy Choices
• 7.3 Exchange Rates, Inflation and Aggregate Demand
• 7.4 Exchange Rates and Monetary Policy

Unit 8 International Capital Flows and Financial Markets

• 8.1 International Capital Flows – Balance and Shocks
• 8.2 Interest Rates, Expectations and Currency Crises
• 8.3 Currency Crises and Exchange Rate Systems
• 8.4 Is There a Case for Controls on International Capital Flows?

Module samples

• M425 Module Introduction (PDF)
• M425 Specimen Examination (PDF)
• M425 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules

Welcome to this module on Risk Management: Principles and Applications. This module has four main aims, to:

• illustrate the main types of risk
• present the most important ideas and methods used in the analysis of portfolios of financial securities, including stocks and bonds
• explain how rational investors can use financial derivatives (mainly, futures and options) in order to alter the risk of their investment position
• illustrate some more specialised risk management techniques, such as Value at Risk and Credit Risk.

The emphasis throughout is on the general principles behind the investment decisions, rather than on case studies or anecdotal evidence. Thus, you will study, for instance,

• the main features of portfolios, which include stocks and bonds,
• how to calculate their risk, and
• how investors can combine their holdings of different securities to reduce their overall risk without sacrificing return.

Similarly, when you deal with futures and options, you will explore how these instruments can be used to manage risk and to expand the opportunity set of investors.

Learning outcomes

When you have completed this module, you will be able to:

• outline the most important strategies of risk management
• explain how stocks and bonds can contribute to the risk and return of a financial portfolio
• discuss the key principles of diversification of financial investment
• correctly measure the risk of financial portfolios
• explain the risk profile involved in financial derivatives, such as futures and options
• discuss the importance of Value at Risk and scenario analysis
• define and use the principles of credit risk analysis

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.

Key texts: Elton EJ, Gruber MJ, SJ Brown & WN Goetzmann (2014) Modern Portfolio Theory and Investment Analysis. 9th Edition. John Wiley & Sons.
Hull JC (2017) Fundamentals of Futures and Options Markets. 9th Edition. Pearson
Crouhy M, D Galai & R Mark (2014) The Essentials of Risk Management. 2nd Edition. McGraw-Hill.

Virtual learning environment: You will have access to the VLE, which is a web-accessed study centre. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Introduction to Risk Management

• 1.1 Introduction to Portfolio Analysis
• 1.2 Risks Faced by Financial and Non-financial Institutions
• 1.3 Financial Securities and Financial Markets
• 1.4 The Mean-Variance Approach
• 1.5 The Opportunity Set under Risk – Efficient Portfolios
• 1.6 Short Sales and Riskless Lending and Borrowing
• 1.7 How to Compute the Efficient Set
• 1.8 Conclusion

Unit 2 Portfolio Analysis

• 2.1 Introduction
• 2.2 The Single-Index Model
• 2.3 Methods for Estimating Betas
• 2.4 Fundamental Betas
• 2.5 Multi-Index Models
• 2.6 Fundamental Multi-Index Models
• 2.7 Conclusion

Unit 3 Management of Bond Portfolios

• 3.1 Introduction
• 3.2 Returns on Bonds
• 3.3 The Term Structure of Interest Rates
• 3.4 Default Risk and Callable Bonds
• 3.5 Duration
• 3.6 Convexity
• 3.7 Passive Bond Portfolio Management – Matching, Immunisation, Indexation
• 3.8 Active Bond Portfolio Management – Index Models
• 3.9 Active Bond Portfolio Management – Swaps
• 3.10 Conclusion

Unit 4 Futures Markets

• 4.1 Introduction
• 4.2 Description of Financial Futures
• 4.3 Pricing of Financial Futures
• 4.4 Futures Strategies
• 4.5 Examples of Using Futures
• 4.6 Interest Rate Futures
• 4.7 Currency Futures
• 4.8 Conclusion

Unit 5 Options Markets

• 5.1 Introduction
• 5.2 Features of Options Contracts
• 5.3 Options on Stocks and Futures
• 5.4 Risk Exposure and Profit Potential of Options and Futures
• 5.5 The Put-Call Parity Formula
• 5.6 Option Pricing – The Black-Scholes Formula
• 5.7 Pricing of Options on Futures
• 5.8 Price Volatility
• 5.9 Conclusion

Unit 6 Risk Management with Options

• 6.1 Introduction
• 6.2 Speculation with Options – Combinations of Calls and Puts
• 6.3 Hedging with Options – against a Price Increase
• 6.4 Hedging with Options – against a Price Decline
• 6.5 Sensitivities of Option Prices
• 6.6 Delta Hedging
• 6.7 The 2007 Credit Crisis and the Role of Derivatives
• 6.8 Conclusion

Unit 7 Value at Risk

• 7.1 Introduction
• 7.2 Definition of Value at Risk
• 7.3 Calculation of Value at Risk – the Variance-Covariance Approach
• 7.4 Delta-Normal VaR
• 7.5 Historical Simulations Approach
• 7.6 Incremental-VaR and DeltaVaR
• 7.7 Stress Testing and Scenario Analysis
• 7.8 Limitations of VaR – EVaR
• 7.9 Conclusion

Unit 8 Credit Risk

• 8.1 Introduction
• 8.2 Credit Rating Systems
• 8.3 Internal Risk Rating
• 8.4 CreditMetrics
• 8.5 Analysis of Credit Migration
• 8.6 Valuation of Bonds
• 8.7 Forward Distribution of Changes in the Value of Bonds
• 8.8 Credit VaR for a Bond or Loan Portfolio
• 8.9 Credit VaR and Calculation of Capital Charge
• 8.10 Conclusion

Module samples

• M423 Module Introduction (PDF)
• M423 Specimen Examination (PDF)
• M423 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules