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## Financial Modelling and Derivatives

2018-2019

### Course Objective

In this course you will learn about financial modelling of risk and
financial derivatives.

In the financial modelling module, the central concept is the
relationship between risk and return on financial assets (bridging
theory and practice).
The goal of this part of the course is to gain insight into the risk
associated with financial portfolios and investments and to be able to
calculate/estimate such risk on the basis of historical data.
Furthermore, other goal is to learn how to construct portfolios on the
basis of mean-variance optimization and how to benefit from
diversification possibilities. Finally, another goal is to learn how to
compute expected returns on investments on the basis of the Capital
Asset Pricing Model and multifactor models (academic and research
skills).

In the derivatives module, the goal is to gain insight into various
financial derivatives such as futures and options, their properties,
valuation and risks associated with them (bridging theory and practice).
Another goal is to
learn how these derivatives can be used to hedge financial risks

Upon accomplishing these goals, you will gain new academic, research and
quantitative skills, as well as develop your professional knowledge in
the area of financial risk and derivatives. Furthermore, by illustrating
the concepts with examples of portfolios, investments and hedging
problems provided by financial institutions, we will bridge the gap
between theory and practice, enabling you to translate theoretical
concepts into practical applications (briding theory and practice).

### Course Content

Central topics in financial modeling that will be discussed are:
- measures of risk in financial markets: variance and volatility of
returns;
- trade-off between risk and return;
- estimation of average return and volatility;
- concepts of covariance and correlation; their estimation;
- risk and return of portfolios;
- diversification;
- universal risk measures: Value-at-Risk and Expected Shortfall;
- concept of efficient portfolio. Markowitz model;
- CAPM;
- multifactor models of risk.

Central topics in the part on derivatives that will be discussed are:
- types and characteristics of financial derivatives;
- use of derivatives in risk hedging;
- options: determining option price with the help of the binomial tree;
- sensitivities of options (Greeks);
- Black-Scholes model for option pricing and its assumptions;
- delta hedging of options;
- implied volatilities and volatility smiles;

Lectures.
Tutorials.

### Method of Assessment

Written midterm test, written exam and computer assignment.

### Literature

J. Berk and P. DeMarzo (2013), Corporate Finance, Pearson, 3rd Global
Edition, ISBN 9781783990320, chapters 10-13, 20-22 and 30).

### Recommended background knowledge

Finance I and Quantitative Research Methods I and II.

### General Information

Course Code E_IBK3_FMD 6 EC P4 300 English School of Business and Economics dr. T.C. Dyakov dr. T.C. Dyakov

### Practical Information

You need to register for this course yourself

Last-minute registration is available for this course.

Teaching Methods Seminar, Lecture, Instruction course
Target audiences

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