Derivatives, Risk and Hedging

Les objectifs du cours

Langue du cours : anglais

To introduce principles of derivatives and to present basic concepts behind options, futures, forwards, swaps, convertible debt, and VaR. To equip students with techniques to be able to hedge various sources of risk such as currency, interest rate, commodity price, volatility and credit risk.

Skills to be acquired : Understanding concepts behind the theory, pricing, and the use of major derivative classes, and being able to implement these concepts and tools to hedge major risks in corporate finance and investment environment.

Plan du cours

• Options

- Option basics (Review)
- Black and Scholes (1973) option pricing model
- Hedging with options
- The Greek letters
- Volatility smile
- Real options (general issues)

• Principles for analysis of risky debt

- Term structure of interest rates and yield curves
- Debt as a put option on the assets of the firm
- Debt management
- Credit ratings
- Default risk and recovery rates
- Comparison of default probability estimates
- Duration, sensitivity analysis, and immunisation
- Active debt management: Credit default swaps

• Hedging financial risk

- Duration and volatility
- Hedging with futures
- Hedging with forwards
- Hedging with swaps

• Valuation of convertible debt
   

• Value at Risk (VaR)
   

Bibliographie

J. Hull, 2011. Options, Futures and Other Derivatives, 8 th Edition, Prentice Hall.

Examen

In-class participation: 5%
Quizzes: 15%
Final exam: 80%