Derivatives, Financial risk management & Governance

The course focuses on thirteen (13) key subjects :

1. Introduction to derivatives: their uses, their payoff profile and resulting exposures
2. Pricing of linear derivatives (non-interest rates)
3. Pricing linear derivatives on interest rates
4. Option valuation & the use of greeks.
5. Structured products
6. The notion of risk: to hedge or not to hedge. What can go wrong.
7. Interest-rate risk management and ALM.
8. The measurement of risk. VaR: concept and methods. Beyond VaR.
9. Financial time-series and volatility (ARCH, GARCH, EWMA).
   Dependencies: correlation and copulas.
10. Advanced credit risk management: credit portfolio management and credit derivatives.
11. (Banking) Liquidity risk management
12. (Banking) Capital risk management
13. Sustainable finance

Each subject comprises pre-readings, mini-cases, slides and excel implementations.

Two applicative cases are foreseen during the course. 

This course is intended to provide students with strong fundamentals in derivatives valuation, and risk assessment and management, together with the general culture associated with it.

The course starts examining the range of existing derivatives (forwards, futures, swaps and options) on the main underlyings, their valuation principles and developments, and their uses. It is an advanced course, although we use financial mathematics in an applied way. It will combine theory and cases.

The course then continues more deeply in the area of risk management, covering the identification of risk exposures, the techniques to quantify and monitor them as well as their management. The decision of a firm to keep or to mitigate risks is a strategic one. The modernisation of the tools to model uncertainties, the increasingly complex range of financial instruments and the growing regulatory body around risk management make it a must for financial managers.

A strong focus is made on financial market, credit, liquidity and capital risks. Applications are concentrated around the banking and insurance industries, as well as on the metiers of CFO and Global Corporate Treasurer. M. Frederic Van Der Schueren, CFO of Belfius Insurance and Chairman of the Belgian National Lottery partners with Prof. Pirotte for this course, in the area of banking regulation and interest rate management. A special chapter on sustainable finance has also been added, in the evolution of the course.

This course is crucial for anyone desiring to work in the finance industry in the future, even more in the light of the recent financial crisis and the forthcoming challenges. Risk management is really a managerial subject first. A good mastering of the measurement and optimisation tools is crucial but only as long as they are connected to business intelligence and action. Monitoring does not necessarily mean to be aware and to manage. The lack of good managerial skills and governance was paramount in the recent events.

The course also comes along with a series of implementations on Excel, and in R. The participants are therefore expected to be at ease with the use of Excel. Some VBA might be necessary. For R, some tutorials and a partnership with Datacamp allows the student to put their feet on the stirrups.

Connaissances et compétences pré-requises ou co-requises

The previous course of Corporate Valuation and Financing (GEST-S408) or equivalently, the following topics that I consider you must be familiar with, i.e.:

1. Mathematics of present value & bond valuation,
2. Asset pricing: the no-arbitrage principle and the replication methodology,
3. Mathematical statistics: volatilities, correlations, multi-variate regressions, probability density functions.
4. Portfolio theory and stock valuation.

These notions are essential for a good comprehension of the course. Without them, we cannot guarantee a correct pedagogical experience. Please come to us if you are registered to this course and think you might be missing some of these notions, to get complementary material.

Last, students must be familiar with the use of Excel.

The learning methods comprise:

1. Key lectures, with pre-readings, mini-case studies, debates and quizzes/Q&As. Excel files are also developed from scratch during the course to illustrate the notions.
   In case of sanitary crisis, these lectures might be taught online.
2. Tutorials.
   In case of sanitary crisis, some of these sessions might be organized as coaching sessions in smaller groups in presential mode, if deemed possible. Otherwise everything will be online.
3. Group works. Two group works will take place: one on Excel and one in R.

Références, bibliographie et lectures recommandées

Main

• Hull, John (2015), Risk Management and Financial Institutions, Wiley; 4^th edition, ISBN 978-1-118-95594-9, 752 pp. (RMH)

Mathematical and Statistical Methods for Risk “Management:

§ Alexander J. McNeil, Rudiger Frey, Paul Embrechts, Quantitative Risk Management: Concepts, Techniques, and Tools, Princeton University Press (September 26, 2005), ISBN 978-0691122557, 608 pp. (QRM)

Other very good references:

• Very pedagogical: Stulz, R. (2002), Risk Management and Derivatives, South-Western College Pub, ISBN: 0538861010.
• A kind of encyclopaedia: Jorion, Philippe (2011), Financial Risk Manager Handbook, John Wiley & Sons 2011, 6^th edition. (FRM)

Additional background to some content can be found in:

§ For derivatives: Hull, J. (2010), Options, Futures, and Other Derivatives, 9^th edition, Pearson Education.

§ For mathematical statistics: Hogg, Craig, McKean (2004), Introduction to Mathematical Statistics, 6^th edition, Prentice Hall, ISBN: 0130085073.

§ For Value-at-Risk (a primer): Jorion, Ph. (2000), Value at Risk: The New Benchmark for Managing Financial Risk, McGraw-Hill; 2 edition, ISBN: 0071355022.

§ For credit risk: Cossin, D. and H. Pirotte (2000), Advanced Credit Risk Analysis: Financial Approaches and Mathematical Models to Assess, Price and Manage Credit Risk, Wiley (UK), ISBN: 0470852720.

For those who would like easy but exciting readings on the subjects covered here, I would suggest (I do not pretend these are the most “neutral” or “to be followed” textbooks but they should trigger some reflections):

• Nassim Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, ISBN: 978-1400063512, April 2007, 400p.
• …more to be precised.

Support(s) de cours

• Syllabus

Informations complémentaires

Given the current Covid19 sanitary situation:

(if a student is directly impacted by Covid19, please refer to us, or through one of your relatives)

1. Key lectures will be provided online, via Teams, in the schedule mentioned on Gehol.. These are “live” sessions allowing full attendance. They might not be recorded.
2. TP session times will be used for TP sessions and coaching sessions. The Excel grid provided at the top of the Teams group folder will show all sessions and which one is a TP session, which one is a caching session. We will try as much as possible to have them in presential mode. TP sessions will use recorded podcasts.

Warning: This is subject to change. Check the Teams group announcements at all times before a given session.

 

The course has 10 ECTS which means that you should devote roughly 250 hours to it:

• Classes: 60h
• TPs (Exercises): 24h
• Preparation TPs: 58h (with R)
• Readings and class preparation: 36h
• Cases: 48h
• Preparation exam: 24h

Contacts

• Prof. Dr. Hugues Pirotte, Academic Director of the Executive Master in Finance and the Master in Business Engineering, Member of the BEL20 Committee.
• Ing. Frederic Van Der Schueren, CIA, CRMA, CIFR, CFO of the Insurance Branch, Insurance.
• Quentin Bodart, CFA, FRM (teaching assistant, on MSFT Teams) will be providing support through the exercise sessions and through his availability at confirmed hours. Please be aware that support relates to the comprehension of the material, the principles and philosophy of the course, not to matters of precision in calculations or semantic details.

Please follow strictly the following convention when sending an email to us: the subject of your email should be composed in the following way: “Derivrisk 2021 > [subject]”, with both my assistant and myself as recipients of that email. Emails without the two persons in copy will be discarded.

An announcement board is organised within the Teams group, through the “Class Notebook”. Information not mentioned there doesn’t exist, i.e. is a pure rumour. Everything will be communicated on Teams to the entire audience. We don’t bear any responsibility for you either (a) not being connected, not asking to be connected to the group, or not telling us that something is wrong with your membership or (b) not being aware of something that is duly posted on that group.

Campus

Solbosch

Méthode(s) d'évaluation

• Examen écrit
• Travail de groupe

Examen écrit

Travail de groupe

(see also the section on Grade calculation)

1. Written exam.
2. Two (2) groupworks.

Construction de la note (en ce compris, la pondération des notes partielles)

Final grade = Final Exam (60%) + Groupworks (40% in total for the two works, 20% each, only if the final exam grade is ≧ 8/20). If the exam grade is ≧ 15/20, the groupworks count only if they are higher than the exam grade.

Each component of the final grade, i.e. the exam and the groupworks, comprises a grading item for the respect of the indications/rules. If any indication/rule related to one of the components is not followed precisely, that item might receive a null grade.

For both presential and online modes:

• The final exam is a closed-book exam, with a personal summary of max. 5 full pages (recto-verso, 10 “faces” in total) handwritten allowed (the own handwriting of the student).

Other rules include:

1. Academic honesty
   1. Our time will always be yours, as much as we can, if you need us and you “fair play”. All winners (all students who have passed, including graduates who have financial careers today, sometimes not necessarily correlated with the level of their grades, but hard workers…) have “played”. And our time should be devoted to those who honestly try.
   2. Plagiarism is a very serious offense and will be punished severely. If you submit a piece of work that contains plagiarized passages, you risk receiving a null grade for the entire piece of work. You should already know what constitutes plagiarism. If you do not know, please ask me.
   3. If the answer to an open question of the exam can be found to be similar to any finding on internet, on a book, on slides of the course or another course, or to the answer of another student, the rule for plagiarism applies here as well, and the sanction will be the following:
      1. The question will be cancelled and assigned a null grade (also for any other student with a similar answer), and
      2. An extra penalty might be foreseen for that question. That means that such a tentative might bear a cost.

The purpose of the exam is to verify your good comprehension of the course. In that sense, writing with your own words is by far the best guarantee to fulfil the task without risking a penalty of any sort.

1. 4. For open questions in the exam. It is always better to write only about what you know about the question. Writing a paragraph with arguments which might not relate to the question or be wrong, can potentially invalidate the whole answer. Adding many arguments hoping that one could be right is not a good strategy and might also invalidate the whole answer. Another example of wrong answer: the question requires to provide advantages and disadvantages on a method or financial product, and the answer provides standard definitions without answering to the actual question.
   5. The grading system allows everyone for a review of the way one or more questions were graded by the instructors. A grading error is something that can obviously happen and we will be happy to correct them; again the purpose of the exam is to verify your good comprehension of the cours Unless there is a clear mistake, only “technical” errors will be checked for, i.e. for example, an answer not taken into account because the page scanned wasn’t attributed to the right question and was overseen by the corrector, or an incorrect sum of points at the end.

But would any “regrade/review” request be formulated in a dishonest way, we keep the right to invalidate the whole review request. Intellectual honesty is a crucial value.
Correction mistakes might go both ways: a regrading correction might not necessarily lead to an increase in final grade but sometimes in a decrease in grade.

2. The groupworks must be performed during the course, and submitted by the last day of the course, or the date defined with the professor if applicable.
   1. Grades for cases are carried-over to the second session according to the rules set by the Solvay Faculty.
   2. If a student is absent to his/her final exam, the groupwork won’t be reported to the year after and will have to be represented by the student within a new group the year after.
   3. If the grade of the groupworks is <10 or the work is not submitted, there is no possibility for a second session on these, since cases must be implemented during the time length of the course.
      In the normal course of things, groupworks are a big plus for the students and helps them in the final grade. Thus, by working normally and consistently, there is normally a good chance that you will get a grade ≧ 10/20 on the groupworks. It is your responsibility not risking to have a grade <10/20, which might push your final grade down if you exam grade is just ≧ 8/20, for example. We are aware of this corner case, but the rule is foreseen for students who actually do the work with the requested effort.
   4. There is no possibility to amend your groupworks after the deadline, or to have a second session or alternative to do them again before the next intake of the course.
       

Langue(s) d'évaluation

• anglais
• (éventuellement Espagnol, français, Néerlandais )