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EXC 3613 Risk Management with Derivatives - RE-SIT EXAMINIATION


EXC 3613 Risk Management with Derivatives - RE-SIT EXAMINIATION

Responsible for the course
Costas Xiouros

Department of Finance

According to study plan

ECTS Credits

Language of instruction

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.

Acquired Skills
During the acquisition of the above mentioned knowledge the students will acquire the following skills:
  • 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.

The acquired theoretical and practical knowledge provided by the course should enable the student to first understand and be able to apply the basic principle behind the pricing and hedging of derivative instruments especially from the point of view of risk-management. Further the student should acquire the ability to appreciate the financial and economic opportunities that derivative instruments offer while also being able to critically assess their role and practical value in light of how these products are being used in practice.

EXC 2110 Basic Financial Management, EXC 3601 Financial Decision Making, EXC 3612 Investment Analysis, EXC 3610 Empirical Methods in Finance, or equivalent.

Compulsory reading
McDonald, Robert L. 2014. Derivatives markets. 3rd ed., New international ed. Pearson Education

Lecture notes, cases, additional exercises and examples will be available on the course-website.. Itslearning

Recommended reading
Hull, John C. 2014. Fundamentals of futures and options markets. 8th ed. Pearson

Course outline
  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

Computer-based tools
Spreadsheets (Excel) will be used for certain practical applications and examples. It is recommended that students become familiar with their use.

Learning process and workload
The course will include a combination of lectures and plenary tutorials where solutions to exercises will be explained and practical examples will be presented.

Specific Information regarding any aspect of student evaluation will be provided in class. It is the student's responsibility to obtain this information. Please note that whilst attendance is not compulsory, it is the students responsibility to obtain any information provided in class that is not included on the course homepage/It's learning or in the text book. Homepages and/or It's learning are not designed for the purpose of students who choose not to attend class.

The following is an indication of the time required:
Plenary tutorials where exercises will be explained
Preparation for lectures and plenary tutorials
Preparation for the final exam
Total recommended use of time

    Re-sit examination is arranged as a three (3) hours individual written exam.
    Examination code(s)
    EXC 36131 Written examiniation, counts 100% towards the final grade in the course EXC 3613 Risk Management with Derivates, 7,5 ECTS

    Examination support materials
    Interest tables and BI approved exam calculator. Examination support materials at written examinations are explained under examination information in the student portal @bi. Please note use of calculator and dictionary in the section on support materials (

    Re-sit examination
    This course was lectured for the last time spring 2015. Last re-sit examinations will be offered autumn 2015, spring 2016 and autumn 2016.
    Please note!
    Whilst the original examination was a process evaluation, re-sit students shall take the written exam only and this will count 100% towards the final grade.

    Additional information