APPLIES TO ACADEMIC YEAR 2016/2017

EXC 3613 Risk Management with Derivatives - RE-SIT EXAMINIATION

Responsible for the course
Costas Xiouros

Department
Department of Finance

Term
According to study plan

ECTS Credits
7,5

Language of instruction
English

Introduction
The recent financial crisis and the growing popularity of financial derivative instruments has brought into light the importance and usefulness of financial risk management with the use of derivative securities both by financial institutions as well as corporations in general. However, it has also brought into light the dangers that arise from the improper use of derivative instruments. Derivatives, for example options and futures, offer ways to manage financial risk by altering the risk profile of the corporation. At the same time derivatives 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 and its instruments 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 two basic derivative instruments, options, forwards and futures (both financial and commodity), 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 mostly through economic reasoning and practical examples rather than technical applications. However, a certain level of mathematically based theory is required to fully understand and appreciate 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 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.

• Represent the payoff of a derivative product both diagrammatically and mathematically.
• 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. Introduction to 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 modell