B5498 - FINANCIAL MODELING AND RISK ANALYSIS

Learning outcomes

The course provides some basic concepts of financial economics and a practical understanding of financial risks as well as of contracts and methods for managing these risks under normal and stressful market conditions. Basics topics are introduced including the term structure of interest rates, annuities and loan repayment, bond pricing market risk, portfolio allocation, an introduction to derivatives and their use for hedging. At the end of the course, students will be able to manage market risk, credit risk and sovereign risk with a number of quantitative techniques.

Course contents

The basic theory of interest: Compounding and discounting: future value and present value, interest and discount factor. Simple interest and compound interes. Nominal and effective annual interest rates.

Annuities: Ordinary annuity and annuity due. The present value and the future value of an annuity. Perpetuities. Discounting of continuous cash flows. Amortization with constant instalments and with constant principal payments. Outstanding principal. Amortization plan. Adjustable-rate loans.

Financial project evaluation under certainty. Discounted Cash Flow (DCF) and Internal Rate of Return (IRR). Annual Percentage Rate.

Bond valuation and yield curve. Term structure of interest rates. Spot rates and forward rates. Yield to maturity. Duration.

Valuation of risky investments. Choice under uncertainty. Mean-variance criterion. Risk and volatility.

Portfolio Theory. Portfolio Selection: Markowitz Model. Two-fund theorem. One-fund theorem and tangency portfolio.

Introduction to derivatives

Readings/Bibliography

D.G. Luenberger, Investment Science, Oxford University Press, 1998.

S.A. Broverman, Mathematics of Investment and Credit (5th edition ), Actex Publications, 2010.

Teaching methods

The lectures will be given at the blackboard and by using slides. Moreover they will be structured in theoretical parts, examples and exercises.

Assessment methods

Written exam with exercises and questions. Students are expected to know the basic quantitative methods discussed during lectures and to critically discern the limitations of the models employed in the analysis.

In case online exams will be envisaged by the University of Bologna, the structure of the written exam is the same. The exam will be run through Zoom and Exams Online (EOL). Detailed instructions on how to manage and hand in the online exam are available on the course page on the VIRTUALE platform.

The maximum possible score is 30 cum laude, in case all answers are correct, complete and formally rigorous.

The grade is graduated as follows:

<18 failed
18-23 sufficient
24-27 good
28-30 very good
30 e lode excellent

Teaching tools

Slides, specialized articles and other didactic material will be made available.

Office hours

See the website of Fabrizio Lillo