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Course 2019-2020 a.y.


Department of Finance

Course taught in English

Go to class group/s: 31 - 32

BIEM (6 credits - I sem. - OP  |  3 credits SECS-P/11  |  3 credits SECS-S/06)
Course Director:

Classes: 31 (I sem.) - 32 (I sem.)

Suggested background knowledge

This is a challenging course: a passion for finance, or a prior acquaintance with the world of investment, need not earn you a passing grade. A good understanding of financial economics and a solid knowledge of financial mathematics and statistics, on the other hand, go a long way. I assume that you are entirely familiar with the mathematics of interest rates (discounting/compounding, equivalence of rates at different maturities), with basic statistics (expected values, standard deviation and variance, ordinary least squares), and calculus (limits, differentials, differentiation, Taylor expansions, partial differentiation, optimization, basic integration). While a small number of concepts may be refreshed in class, it is your responsibility to ensure that you are very comfortable with these background notions.

Mission & Content Summary

Derivatives are a key class of financial instruments, crucial to the functioning of companies and financial intermediaries, and at the center of regulatory debate. By now nearly half of publicly traded industrial corporations make use of financial derivatives for risk management; and these securities are widely employed among financial firms such as investment banks and asset managers. Among the public, there is also the perception of a "dark side" of derivatives, for example in relation to the role they played in the development of the 2007-2008 financial crisis. The purpose of this course is to make you familiar with the main kinds of derivatives, with an emphasis on pricing and hedging issues, and on how investors and corporations can use these instruments in practice.


The main contents of the course are:

  • Introduction to financial derivatives.
  • Futures: Institutional aspects, pricing, and hedging.
  • Swaps: Institutional aspects, pricing, and hedging.
  • Options: Institutional aspects, pricing, and hedging.
  • Basics of credit risk and credit derivatives.

Intended Learning Outcomes (ILO)
At the end of the course student will be able to...
  • Describe the institutional features of the main financial derivatives: forwards/futures, swaps, and options.
  • Recognize some basic credit derivatives, such as credit default swaps (CDS).
  • Explain how those securities are employed to form hedging strategies, in the context of corporate risk management.
  • Define and explain the basic stochastic processes concepts used in the analysis of financial derivatives, and to reproduce key derivations that utilize them.
At the end of the course student will be able to...
  • Acquire the basic tools to solve derivative pricing problems, via replicating/hedging portfolios as well as with risk neutral pricing.
  • Apply those tools to the pricing of forwards/futures, the design of swaps, as well as the pricing of options on binomial trees and with Black-Scholes valuation.

Teaching methods
  • Face-to-face lectures
  • Case studies /Incidents (traditional, online)

The learning experience of this course starts from face-to-face lectures. In addition to those, I distribute problem sets on a weekly basis, to allow the student to apply the analytical tools illustrated in class and practice for the exam. I also discuss a number of case studies, with the purpose of understanding how the tools you acquire in class can be applied in the real world, where the environment is more complex and the relevant data are not laid out as clearly as in your textbook. Throughout the course, and particularly when discussing case studies, I encourage your to bring your own views and share your insights.

Assessment methods
  Continuous assessment Partial exams General exam
  • Written individual exam (traditional/online)
  • x   x

    The grade is determined by a combination of the performance on the final exam and on two online tests, which are distributed during the course via Bboard.

    • On the first time you sit the exam, your grade is determined as (a) 70% times the grade on the final exam plus 15% times the grade on each of the two online tests, or (b) 100% times the grade on the final exam (whichever is more favorable to you).
    • For any resit, your grade is determined exclusively by the final exam, i.e. you forfeit the score on the two online tests.
    • Both the online tests and the final exam include some multiple choice questions and some open-ended questions.
    • In all cases, the questions aim to assess your understanding, knowledge, and ability to apply the the concepts and tools you acquire during the course about hedging with financial derivatives and pricing thereof.
    • They range from solving problems, to simple derivations based on the theory, to discussions of the relevant institutional aspects of the securities we study.
    • There is no distinction between attending and non-attending students.

    Teaching materials
    • The textbook is: J. HULL, Options, Futures, and Other Derivatives, Pearson. I follow the 8th edition; however any reasonably recent edition (including a more recent one) work.
    • In addition to the textbook, we also read and discuss a number of case studies. The cases are purchased by the Library for you, and are made available to you via a link, which I publish on Bboard shortly after the start of the course.
    Last change 27/05/2019 16:11