FIE425 Derivatives and Risk Management (E)

• Topics

  The course covers financial derivative instruments such as forwards and options and shows how these may be priced by stylized models of financial markets such as the binomial or the Black/Scholes model. More advanced derivatives are priced numerically with simulation. As useful by-products of pricing, replicating strategies are derived, which are essential for risk management.

  Topics

  • Pricing by replication in the absence of arbitrage possibilities.
  • Binomial model of derivative pricing.
  • Black and Scholes model of derivative pricing.
  • Pricing of derivatives by Monte Carlo simulation.
  • Forwards/futures.
  • Options.
  • Exotic options.
  • American/European/Asian types of derivatives.
  • Hedging/replication/risk management.
  • If time allows: Value at Risk, credit risk.

• Learning outcome

  Knowledge

  After completing this course

  • The student knows the principles of pricing by (lack of) arbitrage.
  • The student has knowledge about basic derivative instruments, as well as how such instruments are priced. by arbitrage free pricing.
  • The student knows the basic use of derivative instruments in risk management. 

  Skills

  • The student can replicate any derivative instrument's cashflow either by other derivatives or by so-called underlying assets.
  • The student can apply specific models based on no-arbitrage pricing theory to value new kinds of derivative instruments.
  • The student can suggest proper use of derivatives for various hedging situations.

  General competence

  • A student will be able to communicate knowledge, both written and orally to both academics and market specialists of derivatives and to assess risk connected to the use of basic derivatives.

• Teaching

  The teaching consist of regular classes of 2 x 45 minutes twice a week. Active student participation is strongly encouraged.

• Recommended prerequisites

  Knowledge of programming languages ​​(R, C++, etc) are not required for this class, but may be an advantage. Examples of computer code are used for instructional purposes.

• Required prerequisites

  None.

• Credit reduction due to overlap

  None.

• Compulsory Activity

  One approved problem set - to be solved in groups and presented in class.

• Assessment

  A 3-hour written school exam with pen and paper (100%).

  The exam will be written in English, and students are required to answer the exam in English.

• Grading Scale

  A-F.

• Literature

  The literature list is currently under review and will be available when the course starts.

• Permitted Support Material

  Calculator

  One bilingual dictionary (Category I)

  All in accordance with Supplementary provisions to the Regulations for Full-time Study Programs at the Norwegian School of Economics Ch.4 Permitted support material https://www.nhh.no/en/for-students/regulations/and https://www.nhh.no/en/for-students/examinations/examination-support-materials/