EF4321 Derivatives and Risk Management

Part I Course Duration: One Semester Credit Units: 3 Level: B4 Medium of Instruction: English Prerequisites: CB3410 Financial Management or FB3410 Financial Management EF3320 Security Analysis and Portfolio Management EF4320 Advanced Security Analysis and Portfolio Management Precursors: EF3333 Financial Systems, Markets and Instruments Equivalent Courses: Nil Exclusive Courses: EF4420 Derivatives Analysis and Advanced Investment Strategies  Part II Course Aims: This course aims to facilitate students’ learning of financial derivative instruments, and the practice of risk management. Upon completion of this course, students will be able to apply a variety of derivatives models; use options, futures contracts, and swaps to do arbitrage and to form hedging portfolios; and use derivative securities to manage the risk of financial assets. The first part of the course will focus on financial derivative instruments, including a discussion of the nature of various derivative instruments, how they can be used for investment and hedging purposes, and how they are priced. Students are encouraged to develop their discovery and innovative ability by creating various hedging solutions. The second part of the course concentrates on the practice of risk management. It will address various types of risks that firms are exposed to, how to estimate the risk exposure of firms, and the costs and benefits associated with risk management. Students are required to come up with their own analysis on the risk management practices in various aspects of companies. Course Intended Learning Outcomes (CILOs) Upon successful completion of this course, students should be able to: No. CILOs Weighting (if applicable) 1 Understand the basic knowledge of derivative securities and risk management; compare and contrast the different characteristics and purposes of use for various derivatives; explain the risk exposures of companies in various industries. 60% 2 Apply options, futures, forwards, swaps, and etc. to do arbitrage and to form hedging portfolios; discover the arbitrage opportunities by analyzing historical and recent data and test the effectiveness of hedging portfolio in different kinds of scenarios. 20% 3 Use derivatives to manage the risk of financial assets; develop innovative skills by structuring solutions to manage the risk exposure of financial assets of the company. 10% 4 Understand the VAR in risk management; compare the VAR in various portfolios and interpret the difference creatively and critically. 10% Teaching and Learning Activities (TLAs) (Indicative of likely activities and tasks designed to facilitate students’ achievement of the CILOs. Final details will be provided to students in their first week of attendance in this course) TLAs Functions Lectures To provide basic concepts and structure. The lecturer encourages students to think critically and logically, to solve the problems by themselves rather than giving away the solutions without engaging students. Homework Problems The homework problems consist of short questions and calculation questions, with a focus on the prevailing risk management strategies adopted by companies. Students are expected to apply the risk-management theories and to critically analyse the related issues in the financial market. Mid-Term Exam The Mid-Term examination which covers the topics in lectures and coursework will reflect the learning outcomes of students as well as their accomplishments of discovery and innovation. Final Exam The final examination which covers the topics in lectures and coursework will reflect the learning outcomes of students as well as their accomplishments of discovery and innovation. Note: TLAs are not mutually exclusive. Summary of how DEC is incorporated in Assessment Tasks, and Teaching and Learning Activities (TLAs) DEC Elements Assessment Tasks and TLAs Develop students’ attitude to discover and innovate Lectures In-class discussion Develop students’ abilities to discover and innovate, reveal their accomplishments of Discovery and Innovation Assignments Mid-Term Exam Accomplishments of Discovery and Innovation Mid-Term Exam, Final Exam Assessment Tasks/Activities (Indicative of likely activities and tasks designed to assess how well the students achieve the CILOs. Final details will be provided to students in their first week of attendance in this course) Constructive Alignment of CILOs and Assessment Methods Type of Assessment Tasks/Activities Final Exam Assignments Mid-Term Exam Row Total CILO 1 30% 10% 20% 60% CILO 2 5% 5% 10% 20% CILO 3 5% 5%   10% CILO 4 10%     10% Column Total 50% (2 hours exam) 20% 30% 100% Grading of Student Achievement : Letter Grade Grade Points Grade Definitions Remarks A+ A A- 4.3 4.0 3.7 Excellent Strong evidence of original thinking; good organization, capacity to analyse and synthesize; superior grasp of the subject of derivative securities and risk management; evidence of extensive knowledge base as outlined in CILOs; very strong overall ability to discover and innovate, and very strong evidence of accomplishments of discovery. B+ B B- 3.3 3.0 2.7 Good Evidence of knowing how to apply the related concepts outlined in CILOs; strong overall ability to discover and innovate, and strong evidence of accomplishments of discovery. C+ C C- 2.3 2.0 1.7 Adequate Some evidence of knowing how to apply the concepts outlined in CILOs; some ability to discover and innovate, and satisfactory evidence of accomplishments of discover. D 1.0 Marginal Marginal familiarity with the subject of derivative securities and risk management; marginal ability to discover and innovate, and marginal evidence of accomplishments of discovery. F 0.0 Failure Little evidence of familiarity with the subject of derivative securities and risk management; or no show and no excuse in final exam; little evidence of ability to discover and innovate, and little evidence of accomplishments of discovery. Part III Keyword Syllabus: Introduction: Derivative Instruments and Risk Management Derivative Instruments and Fundamentals of Hedging Forward and Futures Determination of Forward and Futures Prices Hedging with Forward and Futures Swaps Mechanics of Options Markets Properties of Stock Options Trading Strategies and Risks with Options Binomial Trees for Pricing Options Option Prices, Delta and the Black-and-Scholes Model Hedging in Practice: Case Studies Using the Greeks, Delta Hedging and Portfolio Insurance  Topics in Risk Management Fundamentals of Risk Management Market Risk and the Value-at-Risk Framework Credit Risk and Credit Risk Management Derivatives Mishaps and What We Can Learn from Them