This course introduces students to the key elements of financial risk management. It examines a broad range of derivative products and demonstrates how they can be used.
The course first introduces the mechanics of exchange-traded futures markets, hedging strategies using futures and the determination of forward and futures prices. We examine how swaps are designed, used and valued. The mechanics of options markets, the properties of stock options and trading strategies involving options are also discussed.
An important aspect of this course is its focus on the valuation of options:
- numerical trees for valuing options using both no-arbitrage arguments and risk-neutral valuation
- the Black-Scholes-Merton option pricing model for valuing European call and put options
- option sensitivities (Greeks) and their applicability in hedging strategies
Once options have been covered, the course proceeds by discussing various methods for calculating the value at risk (VaR) in a portfolio of financial assets.