APPLIES TO ACADEMIC YEAR 2016/2017

EXC 3673 Corporate and Financial Risk Management

Responsible for the course
Bogdan Stacescu

Department
Department of Finance

Term
According to study plan

ECTS Credits
7,5

Language of instruction
English

Introduction
The objective of this course is to provide students with an understanding of corporate and financial risk management: how to measure their financial risks, why corporations should manage them and what tools they may use to do so, which are mainly the derivative securities. The recent financial crisis, however, has also brought into light the dangers that arise from the improper use of derivative instruments. Derivatives allow a firm to fundamentally alter its risk profile but at the same time they facilitate speculation while a third type of participants are the parties who neither speculate nor manage their risk but try to make small profits from mispricing between derivatives and their underlying assets. As a result a basic understanding and intuition of derivatives markets, its instruments and participants is essential not only to students and specialists in finance, but also to general business practitioners.

During this course you will learn the principles behind risk management and how derivative instruments can be used to change the risk profile of a corporation or simply a financial position. You will also learn the basics about the derivatives markets, namely the regulated exchanges and the over-the-counter markets, and their main characteristics that are important from the point of view of the use and pricing of derivative instruments. The course then delves deeper into the basic derivative instruments, options, forwards, futures (both financial and commodity) and swaps, and deals with their structure, use, pricing and hedging. The central ideas around which the whole course is constructed are those of hedging, replication and arbitrage. These ideas will be developed both through economic reasoning and practical examples as well as technical applications. A certain level of mathematically based theory is required to fully understand, appreciate and be able to apply such a technical subject.

Learning outcome
Acquired Knowledge
The students will acquire a good understanding of the derivatives markets and the derivatives securities available for trading. More specifically the students will develop their understanding with respect to the following topics:

• The need to identify the factors to which a firm or a financial position is exposed and the ways to measure risk.
• The principle behind risk-management and the ability to evaluate risk-management practices.
• The derivatives markets which are the regulated exchanges and the over-the-counter markets, their participants, their basic functioning and the idiosyncrasies of each.
• The structure and specifics of the basic derivative securities, futures, forwards, options and swaps.
• The principles behind the pricing of each of the derivative securities, namely no-arbitrage when replication is possible and the bounds and relationships that the no-arbitrage assumption imposes.
• Understand the applicability and limitations of the standard pricing techniques.
• The economic role of the derivative securities and the way they are being and can be used in practice.

• During the acquisition of the above mentioned knowledge the students will acquire the following skills:
• Identify risk factors and represent the payoff of a derivative product both diagrammatically and mathematically.
• Calculate various measures of the total risk of a corporation or a financial position.
• Alter the exposure to a risk factor using derivative securities and plot the final exposure.
• Construct and evaluate various strategies using derivatives.
• Price forwards and futures using the cost of carry model.
• Price options and other derivative securities using the binomial model.
• Price options using the Black & Scholes option pricing model.
• Hedge forwards and futures.
• Hedge options using the binomial model.

1. Risk-management and derivative securities
2. Basic strategies, insurance and hedging using futures, options and swaps
3. Financial Forwards and Futures: Pricing and hedging
4. Commodity Futures: Pricing and cross hedging
5. Parity and other Option relationships
6. Binomial Option pricing: Static replication
7. Black-Scholes Option pricing model