Introductory description

N/A.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

1. Introduction to risk, risk measurement, and risk management.
2. Managing bond portfolios: duration, convexity, immunization, yield curve
3. Hedging with futures: cash-and-carry pricing, hedge ratio
   3A. special cases: index futures, F/Z futures.
   4.1. Options - foundations: contract specifications, the "Greeks", basic strategies.
   4.2. Options - pricing: binomial model, martingale measure, delta hedging.
   4.2.A. towards Black-Scholes: matringale pricing.
   4.3. Options - strategies.
   4.4. Options - advanced: implied volatility, delta/gamma, exotic options.
4. Interest-rate derivatives: forward rates, swaps, caps/floors
   5A. Other derivatives.
5. Value-at-risk.
6. Selected topics.

Learning outcomes

By the end of the module, students should be able to:

• Define and explain the characteristics of different types of derivative securities.
• Explain different types of financial risk and use a variety of tools to quantify such risks in real world situations.
• Use data to estimate or calibrate the parameters of models that describe the dynamics of risk factors.
• Compute the price of derivative securities and construct strategies to hedge the risks involved in writing these.
• Devise, using derivatives, strategies to manage or hedge a given risk exposure and analyse its properties.
• Analyse and interpret financial market or corporate data with a view to quantifying and modelling uncertainty.
• Use a variety of software tools to implement pricing and risk management solutions.
• Apply statistical techniques to time series and/or crosssectional data to analyse and quantify risk.
• Transform the results of a quantitative risk analysis into a report usable by a nonquantitative audience (in other words, produce a risk report for the back office.)

Indicative reading list

Core textbook:
Hull, J.C.: Options, Futures and Other Derivatives (Pearson).
Additional:
Hull, J.C.: Risk Management and Financial Institutions (Pearson).
Chance, D.M. and R. Brooks: An Introduction to Derivatives and Risk Mgt. (Thomson).
Jarrow, R. and S. Turnbull: Derivative Securities (Thomson).
Jorion, P.: Financial Risk Manager Handbook (Wiley).

Subject specific skills

Construct and implement hedging and risk management portfolios.
Compute the values and exposure characteristics (Greeks) of a variety of derivative instruments.

Transferable skills

Qualitatively analyse the risk profile of a given corporate situation and identify the key risk factors.
Design, using a wide range of financial instruments, strategies to hedge and/or manage risk exposure for
(a) corporations (buyers of such risk management), and (b) financial institutions (writes of such products).
Build and calibrate mathematical models to describe, analyse and quantify risk in a given situation.
Communicate effectively the results of a risk analysis and proposed risk management solution.