Derivatives and Risk Management

Code:

2FI07

Acronym:

DRM

Keywords
Classification	Keyword
OFICIAL	Management Studies

Instance: 2013/2014 - 2S (of 10-02-2014 to 06-06-2014)

Active?	Yes
Responsible unit:	Management
Course/CS Responsible:	Master in Finance

Cycles of Study/Courses

Acronym	No. of Students	Study Plan	Curricular Years	Credits UCN	Credits ECTS	Contact hours	Total Time
MIF	76	Bologna Official Syllabus	1	-	7,5	56	202,5

Teaching language

English

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

Presencial

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

Hull J. C.;; Options, Futures and Other Derivatives, Pearson/Prentice Hall, 2011. ISBN: 9780132777421)

Teaching methods and learning activities

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

Distributed evaluation with final exam

Assessment Components

Designation	Weight (%)
Participação presencial	0,00
Teste	80,00
Trabalho escrito	20,00
Total:	100,00

Eligibility for exams

Two interim exams and one group assignment.

Calculation formula of final grade

The final grade will be computed with the following weights:

- 1st interim exam:40%

- 2nd interim exam:40%

- Assignment:20% (groups of 4 students)

Minimum Grade for the interim exams: 70 points (out of 200 points).

Examinations or Special Assignments

Group assignment: the subjects will be discussed in class.

There will be an oral presentation of the group assignment.

Special assessment (TE, DA, ...)

Final Exam.

Classification improvement

Final Exam.