Derivatives and Risk Management

Instance: 2019/2020 - 2S

Cycles of Study/Courses

Last updated on 2020-02-11.

Fields changed: Teaching methods and learning activities, Componentes de Avaliação e Ocupação, Obtenção de frequência, Fórmula de cálculo da classificação final

Teaching language

Objectives

This course is divided into two parts. Part I is dedicated to the main derivative instruments and Part II describes the main sources of risk from the enterprise perspective and presents the instruments available for risk management.

Part I defines the concept of “derivative security” and investigates the mechanics of the markets on which such securities are traded. The significance of derivative securities is analysed both within the context of economic theory as well as from a practitioner’s viewpoint. Special attention is given to the pricing problem of these securities and various methods are studied to solve the problem. It is also discussed how these securities can be used for hedging and risk management. The module analyses the risks associated with derivatives securities, how to measure and manage risk.

Part II of the course aims to provide students with the knowledge needed to understand the usefulness of derivatives and other instruments of risk management both in the perspective of a firm and of a portfolio investor. Thus, the main required competences in this field are related to two themes: (i) the choice of the risk management tools that are more suitable to the objectives of the economic agents and (ii) the strategic choice to be made by the firms about their risk (hedging, letting the decision concerning the risk to the stakeholders or taking more risk). The observation that risk management goes far beyond the hedging strategies is a key objective of the course of Derivatives and Risk Management.

Learning outcomes and competences

The risk management in the perspective both of the investor and of the companies require a deep understanding of its instruments. Given the diversity and complexity of derivative instruments, it is considered to be appropriate to focus on these topics, during the first chapters of the program. After addressing some strategies that agents can use by taking positions in derivatives and after analyzing those strategies in terms of value, we address the contents of the second part of the program, studying other instruments that can be used by investors and companies for risk management. The study of these instruments, particularly those that can be used in a business context, the so-called strategic risk taking, will help meet a key objective that the discipline set out to achieve.

Working method

Program

PART I

I.1. Forwards and Future Contracts

• Futures Markets
• Hedging with Futures
• Forwards and Futures Pricing

I.2. Swaps

• Swaps Markets
• Swaps Pricing

I.3. Options

• Options Markets
• Arbitrage restrictions on options values
• Strategies involving Options

I.4.Option Pricing Models

• Black-Scholes Model
• Options on Stock Indices, currencies and futures

I.5. Advanced Topics

• Exotic Options
• Credit Derivatives

PART II

II.1. Introduction to Risk

• Definition of risk
• Risk management
• Risk aversion vs. Risk loving

II.2. Risk-Adjusted Value

• Discounted cash flow approaches
• Post-valuation risk adjustment
• Relative valuation approaches

II.3. Other Risk Assessment Instruments

• Scenario analysis
• Decision trees
• Simulations
• Value-at-Risk (VaR)
• Real options

II.4. Risk and Value

• Hedging vs. risk taking
• Risk and firm value
• Firm characteristics and risk

II.5. Strategic Risk Management: Hedging

• Risk profile of the firm
• The impact of hedging
• Techniques and instruments for hedging
• Empirical evidence

II.6. Strategic Risk Management: Risk Taking

• How to explore risk
• Organizational factors in risk taking
• Empirical evidence
• Principles of risk management

Mandatory literature

Teaching methods and learning activities

PART I
Flipped classroom: the principle underlying this methodology assumes that the student will prepare before hand the topics assigned to each class. As a consequence the student will have a greater grasp and critical opinion on those topics so we can free class time to solve cases and exercises with the teacher support. For the preparation of each class the students have available in Moodle videos and reading sugestions per class. 
Each class starts with a quiz that will allow the student to assess the effectiveness of the preparation before the class. Afterwards, specific topics will be addressed followed by the clarification of all the questions risen during that preparation. The second part of the class is dedicated to problem-solving and case analysis in groups. 
The students are advised to bring their own laptop to class.

PART II
In addition to the exposure of the theoretical foundations of the field, the classes will be conducted in order to stimulate the debate of ideas and exchange experiences. Some topics will be illustrated with case studies. Work will be developed for practical application of the concepts of derivatives and risk management outside of scheduled contact hours.

Evaluation Type

Assessment Components

Amount of time allocated to each course unit

Eligibility for exams

One of the following continuous assessment regimes:

Calculation formula of final grade

The final grade will be computed with the following weights:

- 5 interim exams: 60%

- Group project: 30% (groups of 4 students)

- Engagement: 10% 

Minimum Grade for the interim exams or final exam in continuous assessment: 60 points (out of 200 points).

Examinations or Special Assignments

Group assignment: the subjects will be discussed in class.

There will be a video presentation of the group assignment.

Special assessment (TE, DA, ...)

Final Exam.

Classification improvement

Final Exam.