Fixed Income Derivatives: Risk Management and Financial Institutions (F) CANCELED

Course content

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

The course will give a thorough understanding of fixed income derivatives, with a focus on how they are used and traded in practice. Fixed income markets, including interest rate swaps, swaptions, caps, floors and credit default swap indices, are some of the most actively traded financial markets, and underpin much of the banking system.

Using the quantitative tools employed in industry, students will learn how to characterize financial risks and how derivatives can be used to mitigate these. As such the course is relevant for students interested in pursuing careers in investment banking, in a public or private treasury operation or within the regulatory authorities.


MSc programme in Economics – elective course
The course is part of the Financial line symbolized by "F"

MSc programme in mathematics-economics

Learning outcome

The lectures will be quite quantitative in nature, as the main pricing models will be derived and explained in detail. Nonetheless, lectures will also focus on how derivatives are traded in practice and considerable time will be spent on covering various market standards to ensure that the models are practically applicable. The focus will be on products that are actually traded – how they work, how they are priced and how the risk is quantified and hedged – in a framework that is as close to reality as possible.

Next to the lectures, students will spend considerable time building pricing and risk management models using Excel and VBA. By the end of the course, students will have built a small pricing library that is as close to market standards as possible.

After completing the course, the student should be able to:


  • 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


  • Use pricing models in Excel/VBA to compute prices and hedge ratios of plain vanilla derivatives

  • Assess and quantify the risks associated with different instruments and construct an appropriate hedge

  • Assess the appropriateness of different pricing models in a given situation

  • Critically assess news media coverage of derivatives


  • Apply models and concepts in a real-world setting, e.g. by devising and executing an interest rate hedge for a corporate bond issue

  • Identify badly structured derivatives that could lead to disastrous outcomes for both counterparties

  • Independently implement standard (closed-form) pricing models in Excel/VBA


Lectures supplemented with computer sessions.

The syllabus for the course in Spring 2016:

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)

Hagan P. and G. West (2006). Methods for Constructing a Yield Curve. Wilmott Magazine

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 an integral 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 considerable time over the course of the semester to 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.

3 hours of lectures per week for 14 weeks.

The course is canceled in Spring 2017.

7,5 ECTS
Type of assessment
Written assignment, 48 hours
individual 48 hours take-home assignment. The exam assignment is given in English and can be answered in English or in Danish. Language must be chosen at the course registration.
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100 % censorship
Criteria for exam assessment

Students are assessed on the extent to which they master the learning outcome for the course.

To receive the top grade, the student must be able to demonstrate in an excellent manner that he or she has acquired and can make use of the knowledge, skills and competencies listed in the learning outcomes.

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 116
  • Exam
  • 48
  • English
  • 206