Risk management with Derivatives
International Business and Finance
Instructors: Giovanna Zanotti, room 210 Via Dei Caniana 2 , office hours: wendesday 17.3019.30 giovanna.zanotti
Geoffrey Poitras, room 210 Via Dei Caniana 2 , office hours:
1. Course objectives
The course introduces students to one of the most important and most technically challenging
areas in finance: derivative securities. Derivative securities include options, futures and forward
contracts and swaps among other securities. This course examines corporate risk management
techniques and how derivatives can be used to manage risk. This course will also cover
institutional characteristics of derivatives exchanges, OTC markets and market clearing
mechanisms. Finally, we will examine the pricing of derivatives and their use to build trading
strategies and structured products. The goal of the course is to provide students with a complete
overview of the main derivatives contracts, describing valuation issues and potential uses.
2. Course Requirements
Course requirements are a basic knowledge of futures, options and swaps. Understanding
derivatives involves logical, often technical, step-by-step approach. It is not possible to go back
and forth between more advanced and more fundamental issues. Instead, we need to gradually
and systematically build our tool kits. If students do not understand the language step by step,
learning about derivatives will become quite difficult. So you are strongly encouraged to attend
classes and to study step by step.
3. Teaching materials
The teaching materials are composed of:
 J. Hull, Options, Futures and Other Derivatives, Prentice Hall, seventh edition (for a list of
relevant chapters and paragraphs see point 3)
 J. Hull, Options, Futures and Other Derivatives, Solutions Manual, Prentice Hall, seventh
edition
 G. Poitras, Commodity Risk Management: Theory and Application, New York: Routledge, 2013
(ISBN-10: 0415879299, ISBN-13:978-0415879293)

Readings and slides prepared by the instructors and available on the course website (accessed
through e-learning)
All the indicated teaching materials, included therefore readings and slides, are compulsory in view
of the final test, except where otherwise indicated.
4. Course structure
Basic Pre-requisites (potentially included in the final exam)
The material covered in the following chapters / parts of Hull’s textbook should be familiar from
your undergraduate studies. You are strongly advised to review the following material on your
own, given that it is necessary to successfully follow and understand the topics which will be
explained in class. The final exam may include questions that require knowledge of these topics.
• Hull, ch. 1
• Hull, c
5. Topics
A. Forwards and Futures
Pricing of forward and futures contracts. Arbitrage with transaction costs. Arbitrage strategies for
stock index futures. Hedging with stock index futures for directional trading and spread trading.
Teaching materials:
 Readings and slides on E-learning site
 Hull, ch. 2 (excluding par. 2.7-2.9)
 Hull, ch. 3
 Hull, ch. 5 (excluding 5.14 and appendix)
B. Forward Rate Agreement
Use of Forward rate agreement to hedge interest rate risk. FRA rates and arbitrage relations.
Pricing and valuation.
Teaching materials:
 Readings and slides on E-learning site
C. Swaps
Pricing and valuation of interest rate swaps..
Teaching materials:
 Readings and slides on the e-learning site
 Hull, chapter 7
D. Options
Options valuation models: binomial and Black-Scholes. Extensions to different underlyings:
exchange rates, futures, stock index futures. Sensistivity coefficients (greeks) and their use in
directional and volatility trading strategies. Options trading simulation. Volatility smile and skew.
Volatility term structure: causes, impact on pricing, trading implications. Introduction to variance
swaps.
Teaching materials:
 Readings and slides on the elearning site
 Hull, chapters 8, 9, 10, 11
 Hull, par. 13.4, 13.11 and 13.12 (for 13.12 limited to the part on European options)
 Hull, ch. 15
 Hull, par.17.4 to 17.10
 Hull, par. 18.1 to 18.5
E. Exotic options: Monte Carlo valuation and structured securities construction
Description of the main exotic options contracts. Use of exotic options for hedging and risk
management. Monte Carlo valuation of exotic options. Equity linked structured securities: index
linked, basket linked, reverse convertibles.
Teaching materials:
 Readings and slides on the e-learning site
 Hull, chapter 24
Teaching materials:
 Readings and slides on e-learning site
F. Risk Management Theory



Measuring Risk and Exposure
Optimal Risk Management Decisions
Strategic Risk Management
Teaching materials:

Poitras (2013), Pt. II, par. 2.1,2.2, 2.3
G. Commodity Risk Management Applications



Base Metal Mining
Oil and Gas Exploration and Development
Airlines and Jet Fuel Hedging
Teaching materials:

Poitras (2013), Pt. III, par. 3.1, 3.2, 3.3
6. Course grading

Course grading will be based on a final written test
Only for students attending the course and for the first exam session
 Written test on the first 6 credits ( Prof. Zanotti) to be held Mid of November
 Written test on the last 3 credits ( Prof. Poitras) to be held at the end of December
From January on students are supposed to give all the 9 credits in a unique final exam.
Final exam may include both theoretical questions and practical exercises. Students are required
to develop autonomy in tackling new problems. The final test will therefore include at least one
exercise with new or unusual aspects (i.e., neither discussed in class nor present on any sample
exercise) requiring deductive reasoning based on the notions learnt in the course.
Even if there will be no assignments, students will be required to attend practice sessions and to
solve ungraded assignments that will be handed out at the end of each part of the course. These
activities are very important in view of the final test and are equally important as standard classes.
During the final written exam (which is a closed-book exam) standard calculators are allowed, but
programmable calculators with text-editing facilities are prohibited. During the exam it is not
allowed to keep mobile phones, iPods or similar devices, even in offline mode.
7. Class Timetable
Wendsday
Thursday
Friday
11.00-12.30
14.30-16.00
14.30-16.00