75571 - Financial Economics and Risk Management

Learning outcomes

The purpose of this course is to give a practical understanding of financial risks and of contracts and methods for managing these risks under normal as well as stressful market conditions, such as those that we have experienced in recent years. Students will be able to manage market risk, credit risk, sovereign, and liquidity risk with a number of quantitative techniques. Research seminars are also included, dealing with new issues, i.e. how financial innovation, risk “mutation”, the increasingly “systemic” nature of risk, and regulatory changes have made risk management more challenging. A special session will be devoted to the analysis of the mechanics of futures and options applied to energy markets, with special emphasis to the role of convenience yield as crucial pricing tool. Mechanics of special derivatives such as Power and Green Certificates will be discussed in details, as well as the basic institutional characters of the whole system of energy commodity trading markets. Common hedging procedures by using derivative contracts (butterfly, spreads, and many others) will be strongly emphasized as crucial aspects of the learning process for this course. Specific features related with oil, gas, power and green certificates markets will be described both in terms of pricing and in terms of hedging mechanisms. At the end of the course practical trading cases and simulations will be presented, given their increasing importance for operators.

Course contents

The purpose of this course is to give  a  practical understanding of financial risks and of contracts and methods for managing these risks under normal as well as stressful market conditions, such as those that we have experienced in recent years. Students will be able to manage market risk, credit risk and liquidity risk with a number of quantitative techniques.

Some products of climate finance will be discussed. One of the great achievemnets of COP21 was the statement that mitigation and adaptation policies involve "making finance flows consistent with a pathway towards low GHGs emissions and climate-resilient development".

Research seminars are also included, dealing with new issues, i.e. how financial innovation, risk mutation, the increasingly systemic nature of risk, and regulatory changes have made risk management more challenging. A special session deals with derivative contracts. A section on real options will provide methods to assess resource extraction, development and management, abatment investments under different policies and global warming risks.

Topics:

1. Prerequisites.

2. Market risk. Definition of financial risk and risk management. Risk measures.

2. The Climate VaR

4. Credit risk. Defaultable bonds.

5. PD, EAD, LGD, recovery rate; rating systems. Heuristic rating models; regression models.

6. Derivatives as financial risk management instruments. Examples.

7. Derivatives and hedging strategies. Simulations of dynamic hedging strategies.

8. Credit risk: structural models (Merton, 1974, J.F, and extensions).

9. Liquidity risk.

10. Climate Finance. Green Bonds.

11.(Mis)Calculated Risk and Climate Change.

12. Investment under uncertainty: introduction to real options.A comparison between financial options and real options

13."Investment and Hysteresis" by Dixit (1992), J. Ec. Perspectives

14. Some applications of the real option methodology: evaluating environmental investments.

15. Abatement investments under different policies

 

Readings/Bibliography

Specialized articles and a reading list will be provided during the course. The reading list will be available in the "Materiale Didattico" website before each lecture.

Here are additional suggested textbooks:

Saunders and Allen, Credit Risk Measurement, Wiley ed. 2002

J. Hull, Options, Futures and other Derivatives, Pearson, 2011

J. Hull, Risk management and Financial Institutions, Wiley, 2012

A. Dixit and R. Pindyck, Investment under Uncertainty, Princeton University Press, 1996

Teaching methods

Lectures & seminars/classes. Assessment during onsite lectures.

Assessment methods

The assessment method is based on the evaluation of a written test for the individual preparation. Students are expected to answer ten questions, including multiple-choice, true-false, or short answers. A mock exam as a sample will be provided at least one month before end of lectures. Students are expected to know the basic quantitative methods discussed during lectures and to critically discern the limitations of the methods employed in the analysis. Emphasis is laid upon applications of real options to environmental cases. Assessment during onsite lectures (consisting of mid-Term mock tests or short case studies reports) are also considered, although they do not attribute weights in the final mark.

 

Additional information on the assessment method will be discussed during the first lecture.

Teaching tools

Lectures and lab classes.

Office hours

See the website of Elettra Agliardi