BUSN3031 Derivatives and Risk Management

The focus of this topic is to examine risks involved whenever a position is taken in real or financial assets. Risk management involves searching suitable strategies and taking actions that mitigate risk. Many ordinary risk management measures such as insurance contracts (general, health and life) are simple and provide basic knowledge of risk management. Therefore insurance as a measure of risk management is explored. Businesses that are operating in domestic and global markets also face additional risk when they attempt to take economic advantages and opportunities and improve their operational efficiency through activities such as outsourcing of major business processes. Therefore techniques available to control financial and operational risk are examined. Various forms of derivatives such as forwards, futures, options and swaps (interest rate and currency) are examined as tools of financial risk management. The importance of option pricing, Greek Letters and Value-at-Risk (VaR) are then considered.

This topic aims to provide students with the ability to:

• Identify and analyse the distinctive features of derivative instruments that can be used to manage risk
• Examine the internal and external risks on management of investment portfolios and financial operations
• Understand the concepts and tools used measuring various types of risks
• Apply risk management practices using real world cases

1. Explain the various exposures to risk and suggest appropriate practices for the quantification and measures of management of different types of risks
2. Identify how insurance is used to manage different types of risk and examine the functions of and role of the relevant regulators
3. Describe the operation of the forward and futures markets and demonstrate how products are priced to manage risk
4. Explain the mechanics of interest rate and currency swaps and their comparative advantage to users
5. Describe the operation of the options market and compute option prices using both binomial and Black-Scholes methodology
6. Exploit arbitrage opportunities using forwards and options
7. Explore risk management strategies, in particular for interest rate, exchange rate, commodity prices and equity prices
8. Apply the 'Value-at-Risk' (VaR) techniques and 'Greek Letters' to measure risk exposure and the sensitivity of the value of a portfolio
9. Describe and measure credit risk and assess the value of collaterised debt obligations and credit default swaps