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THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING & FINANCE MFIN 6204 INTEREST RATE RISK MANAGEMENT Course Outline for Session 2, 2005 LECTURER Office Telephone E-mail Dr.. ASSESSM

THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING & FINANCE

MFIN 6204 INTEREST RATE RISK MANAGEMENT

Course Outline for Session 2, 2005 LECTURER

Office Telephone E-mail

Dr David Colwell QUAD 3065 9385-5851 d.colwell@unsw.edu.au

CONSULTATION HOURS: Wednesdays, 4.00 pm – 6.00 pm, or by prior arrangement

LECTURES

Section A Mon., 6.00 pm - 9.00 pm 190-200 George Street

OBJECTIVE

This subject looks at interest rate risk and techniques for managing risk Topics covered include term structure dynamics (including bond price lattices, spot and forward rate models), analytical and numerical techniques, duration measures, interest rate derivative securities (including options, futures and swaps), and the interaction between interest rate risk and credit risk This course is both

theoretical and practical; the emphasis will be on problem-solving

ASSESSMENT

Assessment is based on an assignment (15 marks), a mid-session examination (40 marks) to be held

on Thursday 8 September, 5:50 pm - 8 pm in class (week 7), and a final examination (45 marks)

The assignment will be spreadsheet based To help you prepare for exams, we will provide practice problems—with solutions—each week

You must achieve at least 42.5 marks out of the 85 marks allocated to the two examinations in order to pass this subject If you fail to obtain this cut-off mark, you have not satisfactorily

completed an essential component and you will be awarded an unsatisfactory fail

The assignment involves working with seven spreadsheets that will be provided to you There will

be one assignment, due the last week of class You will have approximately 3 weeks to do the

assignment You may work in groups of (no more than) 4

REQUIRED TEXT AND READINGS

Lecture notes (see hand-outs)

REFERENCE BOOKS

Sundaresan, S (2002), Fixed Income Markets and Their Derivatives, 2nd Edition, Southwestern

NOTE: the lecture notes are primarily based on Sundaresan’s book, but I do not require that

you buy the textbook

Hull, J.C (2003), Options, Futures, and Other Derivatives, 5th Edition, Prentice Hall

Brigo, D and Mercurio, F.(2001), Interest rate models: theory and practice, Springer Finance

STUDENT RESPONSIBILITIES AND CONDUCT

Workload

It is expected that you will spend at least ten hours per week studying this course This time should

be made up of reading, research, working on exercises and problems, and attending classes In periods where you need to complete assignments or prepare for examinations, the workload may be greater

Over-commitment has been a cause of failure for many students You should take the required workload into account when planning how to balance study with employment and other activities

Attendance

Your regular and punctual attendance at lectures and seminars is expected in this course University regulations indicate that if students attend less than eighty per cent of scheduled classes they may be refused final assessment

General Conduct and Behaviour

You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff Conduct which unduly disrupts or interferes with a class, such as ringing or talking on mobile phones, is not acceptable and students may be asked to leave the class More information on student conduct is available at: www.my.unsw.edu.au

Keeping informed

You should take note of all announcements made in lectures, tutorials or on the course web site From time to time, the University will send important announcements to your university e-mail address without providing you with a paper copy You will be deemed to have received this

information

SPECIAL CONSIDERATION

Attention is drawn to the following extract from the University of New South Wales Calendar

“Procedures”:

“Students who believe that their performance in a subject, either during session or in an

examination, has been adversely affected by sickness or any other reason should inform the Registrar and apply for special consideration in the determination of their standing The

application must be made on the ‘Application for Special Consideration’ form available from the Student Centre This application explains the specific information the University requires in order to make a decision

Such requests should be lodged as soon as practicable after the occurrence and in any event no more than seven days after the final examination in a subject.”

A photocopy of all material supporting an application for special consideration, as lodged with the Registrar, must also be provided to the Lecturer-in-charge within three days of any event for which special consideration is sought Students who fail to do so automatically give

up their rights for special consideration

For special consideration on medical ground, students must inform their doctors to post a copy of the results of any laboratory tests conducted to the lecturer-in-charge directly within seven days of their availability Students must also inform their doctors that the lecturer-in-charge and/or the Examination Assessment Committee may approach them to discuss and learn about the medical condition in details

Students should be aware that ‘minor’ ailments are not eligible grounds for special consideration Any unsubstantiated request for special consideration will be considered to be ‘minor’

Students are expected to complete their work in a timely manner so that an illness in the last few days will not jeopardise the submission of their assignment Such illness will not constitute

grounds for special consideration

NOTE: if you apply for a special consideration for the mid-session, the decision as to whether or not

to approve your special consideration will not be made until after the final exam, when a

committee will meet to consider all submissions

SUPPLEMENTARY EXAMINATION

Students who apply for special consideration are advised that

• the lodging of applications for special consideration does not guarantee that

supplementary assessment will be granted and/or a pass in the subject,

• supplementary examination, if held, will take place during the two weeks prior to the

commencement of session 2,

• it is your responsibility to be available for supplementary assessment during the specified period (holiday plans are not sufficient reason for non-availability),

• it is your responsibility to inform the University Student Centre of any changes to your

addresses and telephone numbers,

• it is your responsibility to check the details of supplementary examination, if any, including

the time, venue, and list of students who are granted supplementary assessment The details

will be posted at the School of Banking and Finance’s notice board as soon as they are

available

ACADEMIC HONESTY AND PLAGIARISM

The University regards plagiarism as a form of academic misconduct, and has very strict rules regarding plagiarism For full information regarding policies, penalties and information to help you avoid plagiarism see: http://www.lc.unsw.edu.au/plagiarism/index.html

Plagiarism is the presentation of the thoughts or work of another as one’s own.* Examples include:

• direct duplication of the thoughts or work of another, including by copying work, or knowingly permitting it to be copied This includes copying material, ideas or concepts from a book, article, report or other written document (whether published or unpublished), composition, artwork, design, drawing, circuitry, computer program or software, web site, Internet, other electronic resource, or another person’s assignment without appropriate acknowledgement;

• paraphrasing another person’s work with very minor changes keeping the meaning, form and/or progression of ideas of the original;

• piecing together sections of the work of others into a new whole;

• presenting an assessment item as independent work when it has been produced in whole or part

in collusion with other people, for example, another student or a tutor; and,

• claiming credit for a proportion a work contributed to a group assessment item that is greater than that actually contributed.†

Submitting an assessment item that has already been submitted for academic credit elsewhere may also be considered plagiarism

The inclusion of the thoughts or work of another with attribution appropriate to the academic discipline does not amount to plagiarism

Students are reminded of their Rights and Responsibilities in respect of plagiarism, as set out in the University Undergraduate and Postgraduate Handbooks, and are encouraged to seek advice from academic staff whenever necessary to ensure they avoid plagiarism in all its forms

The Learning Centre website is the central University online resource for staff and student

information on plagiarism and academic honesty It can be located at:

www.lc.unsw.edu.au/plagiarism

The Learning Centre also provides substantial educational written materials, workshops, and

tutorials to aid students, for example, in:

• correct referencing practices;

• paraphrasing, summarising, essay writing, and time management;

• appropriate use of, and attribution for, a range of materials including text, images, formulae and concepts

Individual assistance is available on request from The Learning Centre

Students are also reminded that careful time management is an important part of study and one of the identified causes of plagiarism is poor time management Students should allow sufficient time for research, drafting, and the proper referencing of sources in preparing all assessment items

* Based on that proposed to the University of Newcastle by the St James Ethics Centre Used with kind permission from the University of Newcastle

† Adapted with kind permission from the University of Melbourne

OTHER RESOURCES, SUPPORT AND INFORMATION

The University and the Faculty provide a wide range of support services for students, including:

• Learning and study support

o FCE Education Development Unit (http://education.fce.unsw.edu.au )

o UNSW Learning Centre (http://www.lc.unsw.edu.au )

o EdTec – WebCT information (http://www.edtec.unsw.edu.au )

• Counselling support - http://www.counselling.unsw.edu.au

• Library training and support services - http://info.library.unsw.edu.au

• Disability Support Services – Those students who have a disability that requires some

adjustment in their teaching or learning environment are encouraged to discuss their study needs with the Course Coordinator or the Equity Officer

necessary adjustments to be made

In addition, it is important that all students are familiar with University policies and procedures in relation to such issues as:

• Examination procedures and advice concerning illness or misadventure

https://my.unsw.edu.au/student/academiclife/assessment/examinations/examinationrules.ht ml

• Occupational Health and Safety policies and student responsibilities;

http://www.riskman.unsw.edu.au/ohs/Policies%20&%20Procedures/UNSW%20OHS%20A ccountability.pdf

LECTURE PROGRAM

The following lecture program is a guide to inform you of the main topics to be discussed and the

references from which the lectures are based This lecture program, together with all the

handouts distributed and unlisted topics discussed in class, constitute the examination

syllabus This syllabus is subject to change with notice Practice problems will be given out

weekly, with solutions given the following week

In the following table, unless otherwise specified, the readings refer to the text by Sundaresan (2nd

Ed.) The Hull references refer to the 5th Ed

1 28 July An Overview of Fixed-Income Securities

Organization and Conduct of Debt Markets

Ch 1 & 2

3 11 Aug Yield-Curve and Term-Structure Analysis Ch 5 & 6

4 18 Aug Treasury Futures Contracts

Swaps

Ch 15 (Hull Ch 5)

Ch 16 (Hull Ch 6)

25 Aug No-Arbitrage Principle and the Term Structure (Part I) Ch 14

5 1 Sept No-Arbitrage Principle and the Term Structure (Part II) Ch 17

6 8 Sept NO LECTURE THIS WEEK

MID SESSION EXAMINATION:

Date: Thursday, 8 September

Time: 5:50 pm - 8 pm Venue: 190-200 George Street Syllabus: materials covered in weeks 1 - 6 You are allowed to bring with you scientific or financial calculators, writing and drawing instruments NO PROGRAMMABLE CALCULATORS WILL BE ALLOWED

Before entering the examination room, for the sake of courtesy

to your fellow classmates, remember to switch off your mobile phones and the beeping function of your digital watches

29 Sept Mid-Session Break—No Lecture

11 13 Oct Securitization and Mortgage-Backed Securities Ch 9

12 20 Oct Agency and Corporate Debt Securities Ch 8

13 27 Oct Portfolio Management Techniques

Risk Management

Ch 12

Ch 19

14 3 Nov Announcement of additional consultation hours for week 14 and

study break Review session