FINQ 764 Derivatives and Risk Management

Spring 2020
Lee Business School
University of Nevada, Las Vegas

Lectures: TBA Office: BEH 525

Office Hours: TBA Phone: TBA
Instructor: Ankur Pareek Email: [Link]@[Link]

Course Description:

The course will focus on the application of financial derivatives and financial engineering to the
issues and problems of financial risk management. The first part of the course concentrates on
introduction and pricing of derivative securities such as forwards, futures, options and swaps. The
second part focuses on the application of these derivative securities for financial risk management
within corporations and financial institutions. Topics will include introduction to derivatives
markets, pricing futures and forwards, Binomial model for pricing options, introduction to
stochastic calculus, Ito’s lemma, no arbitrage pricing of options and Black Scholes model, option
greeks, pricing swaps, managing market risk, credit risk and liquidity risk. The course will also
cover real world case studies to illustrate practical application of financial derivatives to solve
complex risk management problems.

Course prerequisites: Admission in MSQF program or approval by Director of MSQF program;

FIN 708 and FIN 710.

Course Material:

The material for the course consist of two required textbooks, case studies, additional readings
including research articles and lecture slides available for download on the course website
(Canvas).

Required Textbooks:
Options, Futures and other Derivatives 2018 by John Hull, 10th Edition, Pearson.

Value at Risk: The New Benchmark for Managing Financial Risk 2006 by Philippe Jorion, 3rd
Edition, McGraw-Hill Education.

Recommended Readings:

When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.
Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure
in U.S. History by Philippe Jorion, Robert Roper.
Case Studies

We will work on four case studies in this class. The cases are group projects. You can work in
groups of 3 to 4 students. You can choose your group yourself. If you have trouble finding a group,
let me know and I will assign you to a group. Word-processed write-ups (one per group) are due in
class at the start of the case discussion. The four cases for which you are required to write a team
report are:

 American Barrick Resources Corporation: Managing Gold Price Risk HBS Case No. 9-
293-128
 2012 Fuel Hedging at JetBlue Airlines UVA Case No. 6682
 J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-09 HBS
Case No. 9-311-003
 Long-Term Capital Management, L.P. (A) HBS Case No. 9-200-007

All students should come to class ready to discuss issues relevant to the assigned case. The cases
are an integral part of the course design. For each case, I will provide you with a question sheet
designed to help focus your analysis. The following are some general guidelines for case
discussions and preparing case write-ups:
 Identify the objective and the main issues of the case.
 The write up should contain the answers and detailed analysis/steps corresponding to the
questions outlined in the question sheet.
 The main body of your analysis should be self-explanatory and reasonably self-contained. That
is, the reader should be able to replicate your results by tracing through the write-ups.
 State clearly the inputs to your analysis and the chosen methodology. If you feel that certain
assumptions need to be made to justify a solution technique or a parameter choice, please make
the assumption explicit.

Student learning outcomes:

1. Use knowledge of key concepts in Finance to facilitate financial decision making.

2. Think critically about financial risk management problems and provide potential
solutions.
3. Develop a strong understanding of derivative instruments and their applications.
4. Communicate effectively.

Canvas: This course requires an ongoing constant use of canvas. All announcements, assignments,
changes, etcetera are posted there. I also use Canvas to contact you via email therefore it is
important that you be sure that your correct email address is in your profile on Canvas.

In addition to the textbook and required readings, you are encouraged to read popular financial
press articles during the term. The course will occasionally discuss relevant current events.
Recommended sources include:
Wall Street Journal - the old standard
Business Week - good general business magazine
Financial Times - the best international business newspaper
The Economist - the best all around source of information

Yellowdig: We will use this new online platform to share content e.g. research articles, news
articles and videos etc.
Grading:
For the coverage of the exam, anything in the lectures, problem sets or the reading assignments is
fair game. In case you miss the exam for a verifiable and acceptable reason, you should contact me
at the earliest possible to schedule a make-up test.

Problem Sets 20%

Case Studies 40%
Final Exam 40%

Problem Sets

Solving problems is crucial to learning the course material. I will assign graded problem sets and a
few practice problem sets that will help prepare you for the exams. The solutions to the problem
sets will be available on Canvas after they are due. You are welcome to work in groups or alone on
the problem sets. However, you need to write up your individual solution. If you work in a group,
note the names of all group members on your problem set.

Class Participation
Attendance in class is expected. Presence in class permits you to listen, ask questions of
clarification and engage in discussions about the topic covered. In addition, you are responsible for
knowing what goes on in class, which may include material not covered in the readings,
modifications to the syllabus, and announcements concerning exams.
 Detailed Schedule (Subject to revision!):

Week Topic Reading

1 Introductions to Futures Markets Hull Chap. 1-3

Hedging strategies using Futures
2 Pricing of Forwards and Futures Hull Chap. 5-7
Swaps
3 Mechanics of Options Markets Hull Chap. 10-12
Properties of stock options
Trading strategies involving options
4 Binomial trees Hull Chap. 13,14
Stochastic processes and Ito’s Lemma
5 The Black-Scholes-Merton Model Hull Chap. 15, 17
Options on stock indices and currencies
6 Option Greeks Hull Chap. 19, 20
Volatility Smile
7 The Rationale for Risk Management Jorion Chap.1-2
Hull Chap. 35
Case Study: American Barrick Resource
Corporation: Managing Gold Price Risk
(HBS Case # 9-293-128)
8 Financial Risk Management in a Non- Hull Chap. 35
Financial Corporation: Managing Market
Risk

Case Study: 2012 Fuel Hedging at JetBlue

Airlines (UVA Darden Case # 6682)
9 Managing Credit Risk Jorion 3-7, 18
Value at Risk: Building Blocks
Expected Shortfall
10 Managing Risk within a Complex Financial Jorion 15-17
Institution
Value at Risk: Applications

Case Study: JP Morgan Private Bank: Risk

Management during the Financial Crisis
2008 - 2009 (HBS Case # 9-311-003)
11 Managing Liquidity Risk Jorion 13-14
Stress Testing
12 Managing Liquidity Risk Jorion 21
Hull 37
Case Study: Long Term Capital
Management, L.P. (A) (HBS Case # 9-200-
007)
Review
13 Final Exam
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