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2019/2020  KAN-CMECV1701U  Fixed Income Derivatives: Risk Management and Financial Institutions

English Title
Fixed Income Derivatives: Risk Management and Financial Institutions

Course information

Language English
Course ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Start time of the course Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Max. participants 80
Study board
Study Board for HA/cand.merc. i erhvervsøkonomi og matematik, MSc
Course coordinator
  • Søren Bundgaard Brøgger - Department of Finance (FI)
Main academic disciplines
  • Finance
  • Economics
Teaching methods
  • Face-to-face teaching
Last updated on 14-02-2019

Relevant links

Learning objectives
  • Understand the mechanics of derivatives markets
  • Understand market terminology regarding fixed income derivatives
  • Understand the concept of hedging and the relation to pricing
  • Understand the nature of the risk(s) associated with the different instruments covered in the course
  • Understand the nature and motivation of the different participants in the fixed income derivatives markets
  • Be able to use pricing models in Excel/VBA to compute prices and hedge ratios of plain vanilla derivatives
  • Be able to assess and quantify the risks associated with different instruments and construct an appropriate hedge
  • Be able to assess the appropriateness of different pricing models in a given situation
  • Be able to critically assess news media coverage of derivatives
  • Be able to apply models and concepts in a real-world setting, e.g. by devising and executing an interest rate hedge for a corporate bond issue
  • Be able to identify badly structured derivatives that could lead to disastrous outcomes for both counterparties
  • Be able to independently implement standard (closed-form) pricing models in Excel/VBA
Course prerequisites
The course is not intended to be an introductory course. Students are assumed to be familiar with basic fixed income concepts (such as yield curves, duration, convexity) and basic Black-Scholes theory (e.g. from “Corporate Finance and Incentives” or “Pricing Financial Assets”), at least at the level of the Hull textbook ("Options, futures, and other derivatives").

Furthermore, VBA programming will be part of the course. While no prior knowledge of VBA is assumed, students are expected to have some basic programming experience and some familiarity with Excel is a definite plus.

In exchange for a reading list that is short in terms of the page count, the lectures will be dense and students are expected to devote time over the course of the semester to understand and implement pricing functions in VBA/Excel. To facilitate this, lectures will address not only the relevant theory but also include computer sessions that address practical issues.
Fixed Income Derivatives: Risk Management and Financial Institutions:
Exam ECTS 7,5
Examination form Oral exam
Individual or group exam Individual exam
Duration 20 min. per student, including examiners' discussion of grade, and informing plus explaining the grade
Preparation time With the listed preparation time: 20 Minutes
Grading scale 7-point grading scale
Examiner(s) Internal examiner and second internal examiner
Exam period Winter
Aids Open book: all written and electronic aids
The student is allowed to bring to the preparation room: Simple writing and drawing utensils, laptop/tablet as a reference book (NB: there are no electric outlets available), any calculator, books including translation dictionaries, compendiums, notes. PLEASE NOTE: Students are not allowed to communicate with others during the preparation time.
Make-up exam/re-exam
Same examination form as the ordinary exam
Course content, structure and pedagogical approach

Over the last decades there has been an explosive growth in the use of fixed income derivatives. Derivatives are now routinely used not only by financial institutions but also by many private and public entities. At the same time, the widespread use of derivatives is also blamed for playing a destabilizing role during the financial crisis.


The course will give students a thorough understanding of fixed income derivatives, focusing on how they are used and traded in practice. Fixed income derivatives - such as interest rate swaps, FX and cross-currency swaps, swaptions and credit default swaps - are liquidly traded instruments and they underpin much of the financing activity of the corporate and financial sector.


Using the quantitative tools from the industry, students will learn how to characterize and decompose financial risks and how derivatives can be used to hedge or take risk. As such the course is relevant for students interested in pursuing careers in investment banking and capital markets.


The lectures will focus on how pricing models are used and how derivatives are traded and risk-managed in practice and considerable time will be spent on various market standards, trading terminology and so on. We will mainly cover liquid products that are used by many market participants – how they work, how they are priced and how the risk is quantified and hedged.


In parallel with the lectures, students will spend considerable time with pricing and risk management tools in Excel/VBA. By the end of the course, students will have a small pricing library that is reasonably close to market standards.

Description of the teaching methods
Lectures and computer sessions.
Feedback during the teaching period
There will be a number of home assignments that the students will have the possibility to discuss in class.
Student workload
Lectures 42 hours
Preparation 116 hours
Exam 48 hours
Expected literature

Linderstrøm, M. D. (2010). “Fixed income derivatives.” Lecture Notes, University of Copenhagen.


Lecture slides and additional lecture notes.


Hagan, P. et al (2002). “Managing smile risk”. Wilmott Magazine (2002)


Last updated on 14-02-2019