Course description

Risk Management

Introduction

This course provides an introduction to derivatives and financial risk management for non-financial firms. The remarkable growth in the use and complexity of financial derivative instruments and the increasing need of risk management makes the basic understanding of derivative markets and the value of risk management essential not only to students and specialists in finance, but also to general business practitioners. The course will provide the theory of how risk management can generate value for a corporation. It will cover the use and pricing of the fundamental tools, namely derivatives, and the main hedging strategies. It will also give an overview of the derivatives markets. The course will contain several cases on risk management.

Course content

(Details may vary from year to year)

  • Overview of derivatives markets and corporate financial risk management
  • Measuring exposures and risk: Identifying and measuring individual risk exposures. Metrics and tools for risk measurement.
  • Hedging exposures with forwards, futures, options and swaps.
  • Pricing of forwards, futures and swaps.
  • Pricing options and non-linear contingent claims: binomial and Black-Scholes model.
  • The value of risk-management: with and without financial frictions.
  • Case study(ies)

Learning outcome knowledge

By the end of the course the students are expected to know:

  • the risk management irrelevance theorem in the absence of financial frictions
  • the general conditions under which risk management adds value to a corporation
  • the main motives behind hedging for non-financial corporations, e.g. taxes, financial distress costs, etc.
  • the use of the plain-vanilla derivatives, e.g. forwards, futures, options and swaps for optimal hedging and general techniques for hedging linear and non-linear exposures
  • the theory on how risk is priced in the market and how to evaluate risks for a corporation
  • the basic no arbitrage approach to pricing derivative instruments
  • the pricing theory of futures, forwards and swaps
  • the Black & Scholes model for pricing options

Exam organisation

  • Written assignment: 15%
  • Written assignment: 15%
  • Written exam: 70%