UNIVERSITY OF ALBERTA School of Business
Department of Finance and Statistical Analysis
Finance 413 – Risk Management Winter 2022
Section B3 (67542)
Instructor: Wenjie Chen Office: 1-23C Business Building E-mail: [email protected]
Office hours: online session on Zoom, Tuesday 17:30 – 19:00. If you need additional office hours, please email me to make an appointment
I will answer e-mail questions as soon as possible, generally by the end of the following business day. When submitting e-mail questions write in the subject of your message “FIN 413” and a word or words related to your question.
Lectures: Tuesday/Thursday, 15:30 – 16:50, in-person (temporarily live Zoom on eclass until January 23, 2022, pending on updates from University Covid-19 safety measures).
Course Outlines, Evaluation Procedures and Grading System
Policy on Course Outlines, Evaluation Procedures and Grading System can be found at http://calendar.ualberta.ca/content.php?catoid=20&navoid=4939#Evaluation_Procedures_
and_ Grading_System
Overview
Financial risk that arises from the uncertainty in market variables such as interest rates, currency exchange, commodity prices and stock prices are a central issue in the operation of most corporations and financial institutions.
Derivative contracts are widely used by these institutions as a key tool to manage and hedge financial risks and therefore a proper understanding on how they work and how they are priced is critical to any professional in the finance sector. The analysis of derivatives requires strong analytical and quantitative skills and there is a growing demand for people that specialize in the quantitative analysis of derivatives.
Learning Objectives
This course incorporates the Learning Goals of the Alberta BCom Program, in particular Critical Thinking, Written Communication, and Quantitative Skills.
The main purpose of this course is to provide students with a working knowledge of how derivatives can be used in managing financial risks. The course will show how to use and price these securities, describe the markets in which they trade and examine how risk management contributes to firm value.
Course Prerequisites:
- FIN 301
- You should be comfortable with basic statistics concepts such as means, standard deviations, correlations, and properties of the Normal distribution.
- Strong math attitude (although nothing more advanced than algebra will be used in class) will typically be required to comprehend material and complete many assigned problems and exam questions.
- Basic knowledge in calculus is recommended but not required.
Materials
Textbook (recommended): Hull, John C. Options, Futures, and other Derivatives, eleventh edition, Pearson, 2022.
Lecture material posted on eClass.
A calculator. A financial calculator is not required but for the exams you will need a calculator that can raise a number to any power and with exponential and natural logarithm functions.
Grading
You grade is determined as follows:
2 Quizzes: 10%
4 Assignments: 20%
1 Midterm Exam: 25%
1 Final Exam: 45%
You will need at least 50% of the total points and at least 40 % of the total exams points to pass this class. Your final course grade will be based on your absolute achievement and relative performance in the class.
Exams
The Midterm Exam will start at 3:30 pm, Tuesday, March 1, 2022 The Final Exam will start at 9:00 am, Tuesday, April,19, 2022
The Deferred Final Exam (if necessary) will be on Tuesday, May 17, 2022
The Midterm exam will be based on all the material covered until and including the lecture before the exam. The Final exam is cumulative, but most of the exam questions will be based on the material covered after the Midterm exam. Details will be announced in class. The material for the exams includes lectures and the relevant chapters in the textbook however exam questions are not necessarily similar to the end-of-chapter problems. What is important is that you understand the solutions to these problems.
Any request to revise the grade on the Midterm Exam should be brought to my attention no later than the week after the exam has been returned in class. Any such request should include a written explanation as to why more points are warranted, and the exam should be submitted to me. Before writing your request, you should read the exam solutions (Exam solutions will be posted on the class website). Note: if you submit your exam, I will re-grade your entire exam. As a result, you might end up with a grade that is lower than the grade you were initially assigned.
I will follow University regulations regarding absences from exams. Excused absence for a missed exam is not automatic and is granted at the discretion of the instructor (in the case of
midterm exam) or the student’s Faculty (in the case of final exams). Instructors and Faculties are not required to grant excused absences for unacceptable reasons that include, but are not limited to personal events such as vacations, weddings, or travel arrangements. When a student is absent from an exam without acceptable excuse, a final grade will be computed using a raw score of zero for the exam missed. Any student who applies for or obtains an excused absence by making false statements will be liable under the Code of Student Behavior.
To apply for an excused absence a student must first notify me by e-mail within two working days of the missed midterm exam or as soon as the student is able having regard to the circumstances underlying the absence. I can ask for supporting documentation pertaining to the absence. Where the reason for the absence is incapacitating illness, a medical note cannot be required. However, if a student
has seen a doctor, the student may have a
medical note to support the request for an excused absence.
In the absence ofmedical note
, or where the reason for the absence is something other than illness, the instructor can ask students to contact their Undergraduate Office and obtain either a Statutory Declaration or a Faculty Form to outline the reasons for the absence.If you are unable to take the Midterm Exam for an approved reason, the weight will be transferred to that of the final exam. This exam will count for 70% of your course grade, which itself may represent more risk/uncertainty since you will only have “one data point”
(one exam) to show your accomplishment. If you are unable to take the final exam you must apply to write a deferred exam. For more information on University procedures for applying for deferred final examinations consult the Business Undergraduate Office, or go to
https://business.ualberta.ca/programs/bachelor-of-commerce/current-students/exam- policy-procedures/deferred-exams
Assignments
There will be 4 group assignments with problems that will help the students to prepare for the exams. Assignments must be typed. Handwritten assignments will not be graded and will receive a grade of zero. Assignments must be submitted in eClass and late assignments will not be accepted. Each assignment is worth 5% of the overall grade.
Please note the following:
The exam dates, the assignments due dates and the weights allocated to each component of the course grade is not flexible. Make-up or extra work to improve your grade is not possible.
Audio or Video Recording
Audio or video recording, digital or otherwise, of lectures, labs, seminars or any other teaching environment by students is allowed only with the prior written consent of the instructor or as a part of an approved accommodation plan. Student or instructor content, digital or otherwise, created and/or used within the context of the course is to be used solely for personal study, and is not to be used or distributed for any other purpose without prior written consent from the content author(s).
Academic Integrity and Honesty
The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behavior (online at
www.governance.ualberta.ca) and avoid any behavior which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University.
I will deal with cases of academic dishonesty in accordance with the Code of Student Behavior.
Topics
1. Introduction to Risk Management and Derivatives Hull: Ch. 1
2. Forward Contracts Hull: Ch. 2 & 5
3. Futures Markets Hull: Ch. 2
4. Hedging using Futures Hull: Ch. 3 & 6
5. Forward Rate Agreements Hull: Ch. 4
6. Swaps:
Hull: Ch. 7
7. Options Markets Hull: Ch. 10
8. Option Pricing
Properties of option prices. Hull: Ch. 11 The Binomial Model. Hull: Ch. 13
The Black-Scholes Model and its extensions Hull: Ch. 15 & 17
9. Greeks and Hedging Positions in Options Hull: Ch.19
10. Volatility Smiles and limitations of the Black-Scholes Model Hull: Ch.20
11. Options on Futures and Black’s Model Hull: Ch.18
12. Exotic Options Hull: Ch.26
The course lectures will be based on, but will not limited to, material in the book. As we proceed through the course, I may add or drop topics.
