555.645.81 - Interest Rate and Credit Derivatives

Expanded Course Description

The recommended prerequisite is 555.644 (Introduction to Financial Derivatives); otherwise, a strong familiarity of the financial markets and instruments along with a firm understanding of calculus, probability and differential equations. Usually, students with a BS in an engineering discipline, mathematics, or the sciences have what is required.

Course Structure

The course materials are divided into modules. The Modules can be accessed by clicking Course Modules on the left menu. A module will have several sections including the overview, content, readings, discussions, and assignments. Students are encouraged to preview all sections of the module before starting. Most modules run for a period of seven (7) days, exceptions are noted on the Course Outline page. Students should regularly check the Calendar and Announcements for assignment due dates.

Course Topics

• Introduction to Martingale, Measure and the Equivalent Martingale Measure Result
• Standard Market Model for Interest Rate Derivatives
• Convexity, Timing & Quanto
• Models of the Short Rate
• The HJM and LMM Models of the Term Structure
• Swaps Revisited
• Overnight Index Swaps, the OIS, SOFR and Risk- Free Rate
• Credit Risk Modeling
• Advanced Credit Risk Modeling
• Credit Derivatives
• Advanced Credit Derivatives
• Derivatives Mishaps and Lessons Learned

Course Goals

Interest rate and credit derivatives are fundamental to modern finance and the management of capital flows and their application. This course will apply mathematical modeling and analysis techniques to interest rate and credit derivatives so that their valuation, risk characterization, analysis and context in financial structures can be engineered and quantitatively described.

Course Learning Outcomes (CLOs)

• Characterize the fundamental modeling attributes of interest rate and credit derivatives.
• For interest rate derivatives, synthesize a set of Standard Market Models (along with appropriate variations and adaptations) from the fundamental Equivalent Martingale Measure Result.
• Develop term structure models based on the short rate and forward rate models – to include the Heath, Jarrow, Morton model and the Libor Market Model.
• For credit derivatives, synthesize a set of models suitable for characterizing time to default for correlated entities
• Develop credit structuring methodologies for credit default swaps and aggregates of credit default entities; specifically including cash and synthetic credit default obligations (CDO).

Textbooks

Hull, John C (2018). Options, Futures, and Other Derivatives (10th ed.): Prentice Hall

ISBN-13: 978-0134472089

ISBN-10: 0134472089

Textbook information for this course is available online through the appropriate bookstore website: For online courses, search the BNC website at http://ep.jhu.edu/bookstore.

Other Materials & Online Resources

Optional

Hull, John C (2018). Student Solutions Manual for Options, Futures, and Other Derivatives (10th ed.): Prentice Hall

ISBN-13: 978-0134629995

ISBN-10: 0134629995

Student Coursework Requirements

It is expected that each module will take approximately 4–7 hours per week to complete. Here is an approximate breakdown: reading the assigned sections of the texts (approximately 2–3 hours per week) as well as some outside reading, listening to the audio annotated slide presentations (approximately 1–2 hours per week), and writing assignments (approximately 1–2 hours per week).

Be sure to check the Syllabus Addendum on Grading in the Course information Section of Canvas.

This course will consist of four basic student requirements:

Preparation and Participation (Module Discussions) (10% of Final Grade Calculation)

Each student is responsible for carefully reading all assigned material and being prepared for discussion. The majority of readings are from the course text. Additional reading may be assigned to supplement text readings.

Post your initial response to the discussion questions by the evening of day 3 for that module week. Posting a response to the discussion question is part one of your grade for module discussions (i.e., Timeliness).

Part two of your grade for module discussion is your interaction (i.e., responding to classmate postings with thoughtful responses) with at least two classmates (i.e., Critical Thinking). Just posting your response to a discussion question is not sufficient; we want you to interact with your classmates. Be detailed in your postings and in your responses to your classmates' postings.

Feel free to agree or disagree with your classmates. Please ensure that your postings are civil and constructive.

The Instructor will monitor module discussions and will respond to some of the discussions as discussions are posted. In some instances they will summarize the overall discussions and post the summary for the module.

Evaluation of preparation and participation is based on contribution to discussions. Preparation and participation is evaluated by the following grading elements:

1. Timeliness (50%)
2. Critical Thinking (50%)

Preparation and participation is graded as follows:

100–90 = A—Timeliness [regularly participates; all required postings; early in discussion; throughout the discussion]; Critical Thinking [rich in content; full of thoughts, insight, and analysis].

89–80 = B—Timeliness [frequently participates; all required postings; some not in time for others to read and respond]; Critical Thinking [substantial information; thought, insight, and analysis has taken place].

79–70 = C—Timeliness [infrequently participates; all required postings; most at the last minute without allowing for response time]; Critical Thinking [generally competent; information is thin and commonplace].

Assignments (30% of Final Grade Calculation)

Assignments will include a mix of qualitative assignments (e.g. literature reviews, model summaries), quantitative problem sets, and case study updates. Include a cover sheet with your name and assignment identifier. Also include your name and a page number indicator (i.e., page x of y) on each page of your submissions. Each problem should have the problem statement, assumptions, computations, and conclusions/discussion delineated. All Figures and Tables should be captioned and labeled appropriately.

All assignments are due according to the dates in the Calendar.

Late submissions will be reduced by one letter grade for each week late (no exceptions without prior coordination with the instructors).

If, after submitting a written assignment a student is not satisfied with the grade received, the student is encouraged to redo the assignment and resubmit it. If the resubmission results in a better grade, that grade will be substituted for the previous grade.

Qualitative assignments are evaluated by the following grading elements:

1. Each part of question is answered (20%).
2. Writing quality and technical accuracy (30%) (Writing is expected to meet or exceed accepted graduate-level English and scholarship standards. That is, all assignments will be graded on grammar and style as well as content).
3. Rationale for answer is provided (20%).
4. Examples are included to illustrate rationale (15%) (If a student does not have direct experience related to a particular question, then the student is to provide analogies versus examples).
5. Outside references are included (15%).

Qualitative assignments are graded as follows:

100–90 = A—All parts of question are addressed; Writing Quality/ Rationale/ Examples/ Outside References [rich in content; full of thought, insight, and analysis].

89–80 = B—All parts of the question are addressed; Writing Quality/ Rationale/ Examples/ Outside References [substantial information; thought, insight, and analysis has taken place].

79–70=C—Majority of parts of the question are addressed; Writing Quality/ Rationale/ Examples/ Outside References [generally competent; information is thin and commonplace].

<70=F—Some parts of the question are addressed; Writing Quality/ Rationale/ Examples/ Outside References [rudimentary and superficial; no analysis or insight displayed].

Quantitative assignments are evaluated by the following grading elements:

1. Each part of question is answered (20%).
2. Assumptions are clearly stated (20%).
3. Intermediate derivations and calculations are provided (25%).
4. Answer is technically correct and is clearly indicated (25%).
5. Answer precision and units are appropriate (10%)

Quantitative assignments are graded as follows:

100–90 = A—All parts of question are addressed; All assumptions are clearly stated; All intermediate derivations and calculations are provided; Answer is technically correct and is clearly indicated; Answer precision and units are appropriate.

89–80 = B—All parts of question are addressed; All assumptions are clearly stated; Some intermediate derivations and calculations are provided; Answer is technically correct and is indicated; Answer precision and units are appropriate.

79–70=C—Most parts of question are addressed; Assumptions are partially stated; Few intermediate derivations and calculations are provided; Answer is not technically correct but is indicated; Answer precision and units are indicated but inappropriate.

<70=F—Some parts of the question are addressed; Assumptions are not stated; Intermediate derivations and calculations are not provided; The answer is incorrect or missing; The answer precision and units are inappropriate or missing.

Exams (60% of Final Grade Calculation, combined from 30% for Midterm and 30% for Final)

The midterm exam will be available in Module 7 and the final exam will be available in the last Module. Students will have one week to complete the exams and they will be due by 5PM exactly one week from their release.

The exams are evaluated by the following grading elements:

1. Each part of question is answered correctly (50%).
2. Rationale for answer is provided (50%).

100–90 = A—All parts of all questions are addressed;

89– 80 = B—All parts of most question are addressed;

79–70 = C—Majority of parts of most question are addressed;

Grading Policy

Student assignments are due according to the dates in the Calendar and Assignments items in the corresponding modules. The Instructor will post grades one week after assignment due dates.

We generally do not directly grade spelling and grammar. However, egregious violations of the rules of the English language will be noted without comment. Consistently poor performance in either spelling or grammar is taken as an indication of poor written communication ability that may detract from your grade.

A grade of A indicates achievement of consistent excellence and distinction throughout the course—that is, conspicuous excellence in all aspects of assignments and discussion in every week.

A grade of B indicates work that meets all course requirements on a level appropriate for graduate academic work. These criteria apply to both undergraduates and graduate students taking the course.

EP uses a +/- grading system (see “Grading System”, Graduate Programs catalog, p. 10). Example:

Academic Policies

Deadlines for Adding, Dropping and Withdrawing from Courses

Students may add a course up to one week after the start of the term for that particular course. Students may drop courses according to the drop deadlines outlined in the EP academic calendar (https://ep.jhu.edu/student-services/academic-calendar/). Between the 6th week of the class and prior to the final withdrawal deadline, a student may withdraw from a course with a W on their academic record. A record of the course will remain on the academic record with a W appearing in the grade column to indicate that the student registered and withdrew from the course.

Academic Misconduct Policy

All students are required to read, know, and comply with the Johns Hopkins University Krieger School of Arts and Sciences (KSAS) / Whiting School of Engineering (WSE) Procedures for Handling Allegations of Misconduct by Full-Time and Part-Time Graduate Students.

This policy prohibits academic misconduct, including but not limited to the following: cheating or facilitating cheating; plagiarism; reuse of assignments; unauthorized collaboration; alteration of graded assignments; and unfair competition. Course materials (old assignments, texts, or examinations, etc.) should not be shared unless authorized by the course instructor. Any questions related to this policy should be directed to EP’s academic integrity officer at ep-academic-integrity@jhu.edu.

Students with Disabilities - Accommodations and Accessibility

Johns Hopkins University values diversity and inclusion. We are committed to providing welcoming, equitable, and accessible educational experiences for all students. Students with disabilities (including those with psychological conditions, medical conditions and temporary disabilities) can request accommodations for this course by providing an Accommodation Letter issued by Student Disability Services (SDS). Please request accommodations for this course as early as possible to provide time for effective communication and arrangements.

For further information or to start the process of requesting accommodations, please contact Student Disability Services at Engineering for Professionals, ep-disability-svcs@jhu.edu.

Student Conduct Code

The fundamental purpose of the JHU regulation of student conduct is to promote and to protect the health, safety, welfare, property, and rights of all members of the University community as well as to promote the orderly operation of the University and to safeguard its property and facilities. As members of the University community, students accept certain responsibilities which support the educational mission and create an environment in which all students are afforded the same opportunity to succeed academically. 

For a full description of the code please visit the following website: https://studentaffairs.jhu.edu/policies-guidelines/student-code/

Classroom Climate

JHU is committed to creating a classroom environment that values the diversity of experiences and perspectives that all students bring. Everyone has the right to be treated with dignity and respect. Fostering an inclusive climate is important. Research and experience show that students who interact with peers who are different from themselves learn new things and experience tangible educational outcomes. At no time in this learning process should someone be singled out or treated unequally on the basis of any seen or unseen part of their identity. 
 
If you have concerns in this course about harassment, discrimination, or any unequal treatment, or if you seek accommodations or resources, please reach out to the course instructor directly. Reporting will never impact your course grade. You may also share concerns with your program chair, the Assistant Dean for Diversity and Inclusion, or the Office of Institutional Equity. In handling reports, people will protect your privacy as much as possible, but faculty and staff are required to officially report information for some cases (e.g. sexual harassment).

Course Auditing

When a student enrolls in an EP course with “audit” status, the student must reach an understanding with the instructor as to what is required to earn the “audit.” If the student does not meet those expectations, the instructor must notify the EP Registration Team [EP-Registration@exchange.johnshopkins.edu] in order for the student to be retroactively dropped or withdrawn from the course (depending on when the "audit" was requested and in accordance with EP registration deadlines). All lecture content will remain accessible to auditing students, but access to all other course material is left to the discretion of the instructor.