Derivatives and Risk Management
Study Board of Market and Management Anthropology, Economics, Mathematics-Economics, Environmental and Resource Management
Teaching language: English
EKA: B560008112, B560008102
Censorship: Second examiner: None
Grading: Pass/Fail, 7-point grading scale
Offered in: Odense
Offered in: Autumn
Level: Master
Course ID: B560008101
ECTS value: 10
Date of Approval: 19-02-2018
Duration: 1 semester
Course ID
Course Title
Teaching language
ECTS value
Responsible study board
Study Board of Market and Management Anthropology, Economics, Mathematics-Economics, Environmental and Resource Management
Date of Approval
Course Responsible
Offered in
Level
Offered in
Duration
Mandatory prerequisites
Recommended prerequisites
This course requires that the student has prior knowledge of financial markets, financial instruments, and derivatives. The student must be able to compute the present value of a certain stream of cash flows (e.g. from a bond) using the term structure of zero-coupon bond yields. For uncertain cash flow streams one should be able to use risk neutral valuation to compute their values in a binomial model. Understanding how various derivatives (e.g. forwards, futures, swaps, and options) work is also a prerequisite, e.g. one must be able to draw a payoff diagram for an option and explain how it works. These are all competences acquired in the course "Finansiering, investing og virksomhedsstrategi" (course no. 9161001) which is based on the textbook:
* David Hillier, Mark Grinblatt and Sheridan Titman: Financial Markets and Corporate Strategy, European Edition, Irwin/McGraw-Hill, latest edition.
Furthermore, the student should have an elementary background in mathematics and probability theory. In particular one should be able to compute expectations, variances, and covariances of random variables whether their distribution is discrete (e.g. binomial) or continuous (e.g. normal). One also need to know elementary rules of differentiation and integration, e.g. the chain rule for differentiation of composite functions. Finally, it is highly recommended that the student is familiar with vector and matrix notation and know how to solve a system of linear equations. These are all competences acquired in the courses "Matematik" (course no. 9105701) and "Statistik" (course no. 9116001) which are based on the textbooks:
* Knut Sydsaeter and Peter Hammond, Essential Mathematics for Economic Analysis, Pearson Education, latest edition.
* Malcow-Møller, N. og Allan Würtz "Indblik i Statistik", latest edition.
Aim and purpose
The course gives students a thorough understanding of derivatives, their applications, and selected models for the pricing and risk management of derivatives. For the pricing of stock options, the Black-Scholes-Merton model and some alternatives are presented. An overview of fixed income securities is given. Various popular models for the pricing of bonds and derivatives on bonds and interest rates are discussed. An introduction to numerical techniques frequently applied in derivatives pricing problems is also given.
Content
- Forwards and futures
- Stock options: general properties and specific models (the binomial model, the Black-Scholes-Merton model and alternative
- odels)
- Hedging and risk management with options
- Risk-neutral pricing and absence of arbitrage
- Bonds, yield curves, and interest rate derivatives
- Models of the term structure of interest rates
- Interest rate risk management
- Numerical methods: trees, finite differences, Monte Carlo simulation
- Stochastic (Itô) calculus
Learning goals
Description of outcome - Knowledge
Demonstrate knowledge about the course’s focus areas enabling the student to
- Describe and compare the payoffs and practical applications of forwards and futures.
- Explain how forward prices and futures prices can be computed,
- Describe the payoffs and practical applications of European and American call and put options on stocks.
- Describe when early exercise of American options can be optimal.
- Explain how stock prices are modelled in the binomial and Black-Scholes-Merton models.
- Explain how replicating portfolios and option prices can be computed in the binomial and Black-Scholes-Merton models.
- Criticise and reflect over the crucial assumptions in the binomial and Black-Scholes-Merton models
- Describe implied volatility smiles and provide potential explanations of such smiles.
- Describe alternative models for stock option pricing and compare them to the Black-Scholes-Merton model.
- Describe the so-called Greek letters in relation to option pricing and explain how delta, theta, and gamma are related
- Explain the concept of arbitrage and why the absence of arbitrage implies that a derivative asset can be priced by computing a conditional expectation of the properly discounted payoff under a risk-adjusted probability measure or, in some cases, by solving a specific partial differential equation.
- Explain basic bond market terminology
- Describe the payoffs, practical applications, and general pricing results of interest rate forwards and futures, Eurodollar-futures, bond options, caps, floors, collars, swaps, and swaptions
- Explain and criticize selected continuous-time models of the term structure of interest rates
- Explain how interest rate risk can be measured and managed using popular continuous-time models of the term structure of interest rates.
- Explain how selected numerical methods (binomial/trinomial trees, finite difference solutions of partial differential equations, Monte Carlo simulation) can be applied to the pricing of derivatives in selected models and reflect over the applicability of the different methods.
Description of outcome - Skills
Demonstrate skills, such that the student is able to:
- Derive forward and futures prices, and identify when and how the price of a futures contract differs from the price of an otherwise identical forward contract
- Derive the put-call parity
- Apply the binomial and Black-Scholes-Merton models for stock option pricing.
- Derive pricing formulas and replicating portfolios in the binomial and Black-Scholes-Merton model.
- Derive the fundamental partial differential equation and solve it in the Black-Scholes-Merton model and in similar frameworks.
- Compute implied volatility smiles
- Apply alternative models for stock option pricing and compare them to the Black-Scholes-Merton model.
- Apply the Greek letters to hedging and risk management.
- Compute, and relate bond prices, bond yields, and the term structure of interest rates.
- Extract yield curves from bond prices
- Derive general pricing results of interest rate forwards and futures, Eurodollar-futures, bond options, caps, floors, collars, swaps, and swaptions, and derive relations between these derivative securities.
- Derive the fundamental partial differential equation and pricing formulas for selected interest rate derivatives within selected continuous-time models of the term structure of interest rates.
- Compare selected continuous-time models of the term structure of interest rates.
- Compute dynamic interest rate risk measures and apply them to interest rate risk management.
- Compare dynamic interest rate risk measures to the classical Macaulay and Fisher-Weil risk measures.
- Implement selected numerical methods (binomial/trinomial trees, finite difference solutions of partial differential equations, Monte Carlo simulation) and apply them to the pricing of derivatives in selected models.
- Apply Itô calculus.
Description of outcome - Competences
Demonstrate competences, such that the student is able to:
- Identify theoretical or practical applications on which the knowledge and skills obtained above can be applied independently.
- Apply the knowledge and skills obtained above in an interdisciplinary application (e.g., within asset pricing, corporate finance, econometrics, or accounting).
- Use the above knowledge and skills to participate in team work so that the student obtains competences in collaboration and communication.
Literature
Examples:
- Chapters from Hull, J.C.: "Options, Futures, and Other Derivatives", Prentice Hall, newest edition, or similar material.
- Chapters from Munk, C.: "Fixed Income Modelling", Oxford University Press, newest edition.
- Articles and lecture notes.
Teaching Method
Workload
Scheduled classes:
4 hours of lectures (2x2) weekly for 11.5 non-consecutive weeks.
The lecturing period can be extended due to intervening project or assignment work.
2 hours of exercises for 13 weeks.
Workload:
The students' workload is expected to be distributed as follows:
Lectures - 46 hours
Preparation, lectures - 92 hours
Class exercises - 26 hours
Preparation, exercises - 52 hours
Assignments - 49 hours
Examination - 5 hours
Total 270 hours.
Examination regulations
Exam
Name
Exam
Timing
Home assignments (part 1)
Exam: During the semester
Reexam: February
Written exam (part 2)
Exam: January
Reexam: February
Tests
Home assignments (part 1)
Name
Home assignments (part 1)
Form of examination
Take-home assignment
Censorship
Second examiner: None
Grading
Pass/Fail
Identification
Student Identification Card - Exam number
Language
English
Duration
Weekly (date for submission will appear from the examination plan).
Length
No limitations.
Examination aids
All exam aids allowed.
Assignment handover
Course page in Blackboard.
Assignment handin
Via SDUassignment in the course page in Blackboard.
ECTS value
1
Additional information
Assignments solved in groups of up to three students. The instructor is in charge of approving the groups.
The assignments consists of six weekly sub-assignments. At least four sub-assignments must be answered satisfactorily in order to pass part 1.
Internet Access: Necessary.
Re-examination
Form of examination
Oral examination
Identification
Student Identification Card - Date of birth
Duration
20 minutes.
Examination aids
All examination aids allowed.
Additional information
Individual oral examination (20 minutes without preparation) based on the assignments in the ordinary exam for part 1.
The examination tests the students' achievement on all specified targets.
EKA
B560008112
Written exam (part 2)
Name
Written exam (part 2)
Form of examination
Written examination on premises
Censorship
Second examiner: None
Grading
7-point grading scale
Identification
Student Identification Card - Exam number
Language
English
Duration
5 hours
Length
No limitations
Examination aids
All exam aids allowed. However, it is not allowed to communicate with anybody.
Assignment handover
In the examination room.
Assignment handin
Via SDUassignment in the course page in Blackboard
ECTS value
9
Additional information
Exam form for international exchange students: 10-hours take-home assignment.
Date for submission will appear from the examination plan.
The examination tests the students' achievement on all specified targets.
Re-examination
Form of examination
Oral examination with preparation
Identification
Student Identification Card - Date of birth
Preparation
20 minutes.
Duration
20 minutes.
Examination aids
All exam aids are allowed at the preperation.
Assignment handover
In the examination room.
Additional information
The examination is based on a randomly drawn topic, but can also include questions in other topics from the syllabus.
The examination tests the students' achievement on all specified targets.
EKA
B560008102
External comment
NOTE - This course is identical with the former course 9427401 Derivatives and Risk Management.
Used examination attempts in the former identical course will be transferred.
Courses that are identical with former courses that are passed according to applied rules cannot be retaken.
The student is automatically registered for the first examination attempt when the student is registered for a course or course element with which one or more examinations are associated. Withdrawal of registration is not possible, and students who fail to participate in an examination have used one examination attempt, unless the University has made an exemption due to special circumstances.
If a student does not meet the established university prerequisites for taking the exam, he or she has used one examination attempt, unless the University has made an exemption due to special circumstances.
The student is responsible for registering for 2nd and 3rd examination attempt.
Evaluation at the re-exam may be changed.
Courses offered
Offer period | Offer type | Profile | Education | Semester |
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Fall 2018 | Optional | Global Logistics and Supply Chain Management - Organization Combination | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | |
Fall 2018 | Optional | MA Negot 120 ECTS German language profile International Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Arabic language profile International Market Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS German language profile Global Marketing Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Spanish language profile International Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS English language profile International Communication Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Arabic language profile Global Marketing Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS German language profile International Communication Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS English language profile International Market Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Spanish language profile Human Ressource Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS German language profile International Market Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Spanish language profile Global Marketing Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Arabic language profile Human Ressource Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Arabic language profile International Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Arabic language profile International Communication Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS English language profile Global Marketing Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Spanish language profile International Market Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS English language profile Human Ressource Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS Spanish language profile International Communication Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS German language profile Human Ressource Management | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Optional | MA Negot 120 ECTS English language profile International Relations | Master of Arts (MA) in Business, Language and Culture | Odense | |
Fall 2018 | Mandatory | Accounting and Finance | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | 1 |
Fall 2018 | Optional | Global Logistics and Supply Chain Management - Accounting Combination | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | |
Fall 2018 | Optional | Management Accounting - Combination 2 | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | |
Fall 2018 | Optional | Management Accounting - Combination 1 | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | |
Fall 2018 | Optional | Management Accounting - Combination 3 | MSc in Economics and Business Administration | Master of Science (Msc) in Economics and Business Administration | Esbjerg, Soenderborg, Slagelse, Odense, Kolding | |
Fall 2018 | Optional | Cand.merc.aud. - Odense - 140 ECTS - HD-R (sidste optag 1. september 2017) | Master of Science (MSc) in Business Economics and Auditing | Master of Science (MSc) in Business Economics and Auditing | Odense, Kolding | |
Fall 2018 | Optional | Cand.merc.aud. - Odense - 120 ECTS (sidste optag 1. september 2017) | Master of Science (MSc) in Business Economics and Auditing | Master of Science (MSc) in Business Economics and Auditing | Odense, Kolding | |
Fall 2018 | Optional | Cand.merc.aud. - Odense - 140 ECTS - HD-F (sidste optag 1. september 2017) | Master of Science (MSc) in Business Economics and Auditing | Master of Science (MSc) in Business Economics and Auditing | Odense, Kolding | |
Fall 2018 | Mandatory | Cand.scient.oecon (Finansiering) | MSc in Mathematics-Economics | Master of Science (MSc) in Mathematics-Economics | Odense | 1 |
Fall 2018 | Optional | Cand.scient.oecon (Statistik) | MSc in Mathematics-Economics | Master of Science (MSc) in Mathematics-Economics | Odense | |
Fall 2018 | Optional | Cand.scient.oecon (Operationsanalyse) | MSc in Mathematics-Economics | Master of Science (MSc) in Mathematics-Economics | Odense | |
Fall 2018 | Mandatory | Master of Science in Economics (with profile in Finance) | MSc in Economics | Master of Science (MSc) in Economics | Odense | 1 |
Fall 2018 | Optional | Master of Science in Economics (with profile in Economics) | MSc in Economics | Master of Science (MSc) in Economics | Odense |