book from their bachelor course in finance. We shall only need one chapter in this course so if you do not have the book
Derivatives and risk management Patrick L. Leoni Department of Business and Economics University of Southern Denmark Campusvej 55, DK-5230 Odense M, Denmark E-mail:
[email protected] Purpose. The course gives students a thorough understanding of derivatives, their use in risk management, and models for the pricing of derivatives. For the pricing of stock options, the Black-Scholes-Merton model and some alternatives are presented. An overview of fixed income securities is given. Various popular models for the pricing of bonds and derivatives on bonds and interest rates are discussed. Other topics introduced are credit risk, value at risk, and numerical techniques frequently applied in derivatives pricing problems. The overall structure of the course. 22 lectures of two hours each. The lectures are in room 133 on Mondays and Wednesdays 8-10am, starting on Monday September 1. Times may be changed if too inconvenient. In some weeks there are no lectures. Instead students are supposed to work on assignments. Exam. Individual oral examination scheduled in early January, with exact dates to be given later. Each student draws a question from a pool of questions that will be published in early December. The student then has 20 minutes to prepare a presentation related to that question and subsequently present that to the teacher and an external examiner (“censor”). There will be 20 minutes in total for the student’s presentation, supplementary questions from the teacher and the external examiner, and for the discussion of the appropriate grade in the 7-step scale. For exchange students the oral examination will take place in December and will not involve an external examiner, but except for that the procedure is identical. There will be a re-take exam in June 2008.
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Assignments. Before taking the exam the student has to pass two assignments. The two assignments have to be passed in the same semester. Assignments are only offered in the term where the course is taught. The assignments are to be solved in a group of two or three students unless I explicitly grants an exemption from this rule before the assignment is handed out. The assignments are evaluated on a pass/fail basis. The purpose of the assignments is to test the student in one or more targets in depth, in particular in topics not well-suited for the oral examination. The assignments are scheduled as follows: • Assignment 1: handed out on Wednesday 8 October after class via the BlackBoard information system, report due Monday 20 October in class. • Assignment 2: handed out during the study week in November. Details will be given later. Teaching material and tentative plan for the course. will be posted on internet at the address
The lecture notes
http://patrick.l.leoni.googlepages.com/derivativesandriskmanagement-fall08
The notes are compressed for convenience, but I give a link to free and reliable unzipper on the site. The following books are essential, and they are strongly recommended for purchase. • John C. Hull, Options, Futures, and Other Derivatives (6th edition, 2006, Pearson Prentice-Hall), which can be purchased at the university bookstore • Mark Grinblatt and Sheridan Titman, Financial Markets and Corporate Strategy by (2nd edition, 2002, McGraw Hill). Local students know this book from their bachelor course in finance. We shall only need one chapter in this course so if you do not have the book, consider borrowing it. Note however that more chapters from the book will be used in the course Corporate finance • Claus Munk, Introduction to Fixed Income Analysis, which in due time will be distributed through the BlackBoard information system • Claus Munk, Numerical Solution of Partial Differential Equations in Finance and will also be distributed through the BlackBoard information system.
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Numbers refer to chapters and sections. Material may be added during the semester.
Lecture
Topic
Literature
1 2 3 4 5 6 7 8 — 9 10 11 12
Introduction and overview Forwards, futures, and swaps – continued – Introduction to options The binomial model for option pricing The Black-Scholes-Merton model for option pricing – continued – – continued – Assignment 1 and Fall break The “Greeks” General pricing methods Numerical techniques Volatility smiles and alternatives to the BSM model Interest rates concepts Interest rate derivatives Interest rate models – continued – Interest rate risk management Assignment 2 Mortgage-backed bonds Credit risk – continued – Value at risk
Hull Hull Hull Hull Hull Hull Hull Hull — Hull Hull Hull Hull
13 14 15 16 17 — 18 19 20 21
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1; GT 21 2, 3 5 8, 9, 10 11, 17.1-4 12 13 14 15 25; IFIA 3.2 17.6-8, 24.7; PDE 16, 24.1-3
IFIA 1, 2 (Hull 4) IFIA 3 (Hull 6, 7, 26) IFIA 4 (Hull 28) IFIA 5, 6 (Hull 29.2) IFIA 7 — IFIA 8 (Hull 29.3) Hull 20-21? Hull 20-21? Hull 18
