Introduction to Financial Derivatives and Risk Management
Objectives
Learning Outcomes
LO1: Recognize market, liquidity and operational risks and awareness of the potential impacts of these risks
LO2: Learn tools to quantify risk and financial instruments available for risk management purposes
LO3: Introduce hedging practices to handle some financial market risks
Learning Units
LU1: Importance of risk management
- Types of risks in organizations
- The role of financial hedging
LU2: Liquidity risk
LU3: Introduction to Asset and liability Management (ALM)
LU4: Introduction to financial derivatives (linear): futures and forwards
- Difference between futures and forwards
- Non-arbitrage principle and the cost of carry
- Payoff charts
LU5: Other financial derivatives: swaps (IRS, CDS and EQS)
LU6: Introduction to non-linear Derivatives (non-linear)
- Definition of call and put
- Fundamental concepts for options valuation
- Payoff and P/L charts
LU7: Introduction to measures of risk quantification
- VaR, Stress Testing and Backtesting
LU8: Operational risk
General characterization
Code
33165
Credits
6
Responsible teacher
Luís Pinheiro
Hours
Weekly - 3
Total - 36
Teaching language
Portuguese
Prerequisites
Not Applicable
Bibliography
-Jorion, Philippe (2009). Financial Risk Manager HandBook. 5th Edition. New York: Wiley Finance.
-Taleb, Nassim (2018).Skin in the Game-Hidden Asymmetries in Daily Life. New York: Random House.
-Fabozzi, Frank (2005). The Handbook of Fixed Income Securities. 7th Edition. New York: McGraw-Hill.
-Smithson, Charles (1998).Managing Financial Risk: A Guide to Derivative Products, Financial Engineering, and Value Maximization. 3rd Edition. New York: McGraw Hill.
-Hull, John (2000).Options, Futures and Other Derivatives. 4th Edition. New York: Prentice Hall.
Teaching method
The final grade of this curricular unit considers the grades of the homework's and the final exam according to the below criteria. Before the criteria details some important remarks:
- The criteria will apply to both, 1st and 2nd call and special examination period.
- The criteria assumes that students will attend the exams physically in the University, which could have the classical paper format or through an online exam (Moodle), this also done in the University facilities.
- Final remark, in the case there is another lockdown or any special measures due to the Pandemic COVID-19 or other extraordinary event, which implies a contingency plan action and the need to change classes and exams all to online format, the criteria will suffer adjustments that will also be outlined in the first class of the semester.
Criteria of Final Grade, weighted average:
40% - Homework's (HWI- 20%, HWII- 20%);
60% - Exam, with a minimum of 7 points requirement, otherwise fail.
In addition to the minimum exam requirement, to be approved in the curricular unit, the final weighted average should be greater or equal than 10 points (scale from 1 to 20 points).
Note: Rounding procedure will only take place in the final weighted average number and not in the individual components of the evaluation!
Evaluation method
Theory and practice will be part of the course. Some practical examples are taught in class and others will be provided through homeworks. At the end of the semester there will be a final exam.
Subject matter
Class 1 - Introduction and Financial Market Revisions I (Markets and Conventions)
Class 2 - Financial Market Revisions II (Cash Financial Instruments and Performance Measures)
Class 3 - Risk Management
Class 4 - Introduction to Linear Derivatives: Futures, Forwards
Class 5 - Practical I - Homework I
Class 6 - Introduction Financial Derivatives: Swaps I
Class 7 - Introduction Financial Derivative s: Swaps II
Class 8 - Introduction non-linear Derivatives: Options
Class 9 - Liquidity Risk and Asset and Liability Management
Class 10 - Practical II - Homework II
Class 11 - Market Risk (VaR)
Class 12 - Operational Risk
(*) Class number may not correspond to the exact week given eventual interim break or holiday.