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2011/2012  KAN-OE22  Derivatives and Risk Management

English Title
Derivatives and Risk Management

Course Information

Language English
Point 7,5 ECTS (225 SAT)
Type Mandatory
Level Full Degree Master
Duration One Semester
Course Period Spring
Time Table Please see course schedule at e-Campus
Study Board
Study Board for MSc in Advanced Economics and Finance
Course Coordinator
  • Jesper Lund - Department of Finance
Main Category of the Course
  • Economics, macro economics and managerial economics
Last updated on 29 maj 2012
Learning Objectives
Students are required to:
  • Understand the use of derivative securities
  • Be able to price derivative securities by no-arbitrage methods
  • Be able to build dynamic models of the term structure of interest rates
  • Understand basic credit risk modelling concepts
  • Be able to apply and understand Value-at-Risk based risk measures.
  • Understand the role of financial risk management in financial institutions
Derivatives and Risk Management
Final exam:
Assessment Oral with Written Assignment
Marking Scale 7-step scale
Censorship External examiners
Exam Period May/June
Aids Without preparation
Duration 20 Minutes
The examination has two parts:
Part 1 (10 minutes): Three weeks before the exam, the students are given 5-7 topics for which they have to prepare a 10 minute presentation. At the beginning of the examination, the student chooses one of the topics at random and immediately thereafter gives the presentation. Only the prepared presentation is available to the student during the exam (no other notes, course material or exam aids of any form).
Part 2 (8-10 minutes): The student is asked questions in parts of the curriculum different from the part covered in part 1. The implementation exercises given during the semester are part of the curriculum and can be made a part of the examination.
Purpose of the exam: The exam tests the student’s ability to select important aspects of a topic and to present these aspects clearly and concisely. This ability is central to almost any career that the students would want to pursue in the future.
Prerequisites for Attending the Exam
The students must hand in 2 home assignments during the course and must pass them both on an approved/not approved basis before the final exam.
If a student - due to documented illness or failed attempts - does not pass both assignments, the student will be given a final chance to retake this part of the course by handing in a new assignment prior to the final exam.

Course Content

The purpose of this course is to give students a thorough understanding of derivatives, models for pricing derivatives, and to understand their role in financial risk management. We cover the Black-Scholes-Merton option pricing model and some alternatives. We give an overview of fixed income securities and discuss bond pricing, the term structure of interest rates and term structure derivatives, including prepayment options in mortgage-backed securities. Credit risk and credit derivatives are also covered, as is Value-at-Risk (VaR) and related risk measures. The course will present numerical techniques frequently applied in derivatives pricing problems. The course is a fundamental quantitative finance course with wide applications in advanced financial institutions. It builds heavily on the first semester course in Asset Pricing Theory and to some extent on Corporate Finance.

Teaching Methods
The format of the course is based on the following elements:
• Class lectures devoted to the fundamental theoretical issues
• Class exercises
• Two written assignments
Student Workload
SAT 225 hours
Further Information
Part of this course may also be taken as a Phd course by a limited number of Phd students.

John C. Hull, “Risk Management and Financial Institutions”, 2010 (main textbook for the course).
Additional literature TBA before the course starts