Flinders University - BUSN3031: Derivatives and Risk Management

The focus of this topic is to examine risks involved whenever a position is taken in real or financial assets. Techniques available to control financial and operational risk are examined. Various forms of derivatives such as forwards, futures, options and swaps (interest rate and currency) are examined as tools of financial risk management. The importance of option pricing, Greek Letters and Value-at-Risk (VaR) are then considered.

On completion of this topic, you should be able to:

• describe the operation of the forward and futures markets and demonstrate how products are priced to manage risk;
• explain the mechanics of interest rate and currency swaps and their comparative advantage to users;
• describe the operation of the options market and compute option prices using both binomial and Black-Scholes methodology;
• exploit arbitrage opportunities using forwards and options;
• explore risk management strategies, in particular for interest rate, exchange rate, commodity prices and equity prices;
• and apply the 'Value-at-Risk' (VaR) techniques and 'Greek Letters' to measure risk exposure and the sensitivity of the value of a portfolio.