Derivatives, Risk and Markets (IND640)

This course gives and introduction to price determination and sources for price volatility, as well as the most common tools to address these risks


Course description for study year 2024-2025. Please note that changes may occur.

Facts

Course code

IND640

Version

1

Credits (ECTS)

10

Semester tution start

Autumn

Number of semesters

1

Exam semester

Autumn

Language of instruction

English

Content

NB! This is an elective course and may be cancelled if fewer than 10 students are enrolled by August 20th for the autumn semester.

This course covers a combination of fundamental analysis of commodity markets in addition to looking into measures of risk and instruments to handle those risks through hedging.

Content:

  • Fundamental demand and supply analysis of commodity markets
  • Equilibrium displacement model
  • Applied price analysis
  • The role of storage in commodity markets
  • Futures markets
  • Optimal price risk hedging

The course consist of three parts; markets, risk and derivatives

The first part of the course covers the different parts of a market equilibrium. It will be shown how different factors influence supply and demand. This provides the tools to investigate the price determination process for commodities and assets as well as how market characteristics influence price volatility.

The second part will cover portfolio theory and risk management. Portfolio theory explains the relationship between risk and return and this course will provide a set of tools for portfolio analysis. In particular, Value-at-Risk (VaR) is explained. VaR is a method used in financial markets and for regulatory purposes to estimate the worst-case scenario for a portfolio, and is estimated using parametric, historical and Monte Carlo estimation methods.

The third part deals with commonly applied market based instruments to deal with price risk, such as futures contracts, swaps and options. This will include the role of speculation in commodity markets. We will also look at management of commodity stocks (storage), and its influence on price determination and price volatility, including the relationship between spot and futures markets.

Learning outcome

Knowledge:

  • Understand how the utility maximization problem drives demand for goods and the profit maximization problem drive the derived demand for commodities
  • Learn what sets commodity price behavior apart from other goods and services
  • Be familiar with the equilibrium displacement model (EDM)
  • Understand basic data analysis of commodity prices
  • Understand how storage affects commodity price behavior and volatility
  • Understand the risk and return tradeoff and how they affect portfolio theory
  • Understand the most important Value-at-Risk (VaR) methods
  • Futures and options markets for commodities
  • Learn about market-based price risk hedging

Skills:

  • The candidate is able to apply the logic of supply and demand models to specific commodity markets.
  • The candidate is able to apply the equilibrium displacement model to commodity markets
  • The candidate can estimate basic supply, demand, and price response functions
  • The candidate can analyze the impact of commodity market news on commodity prices
  • The candidate can analyze risk and return tradeoffs
  • The candidate can apply and interpret risk in a portfolio using Value-at-Risk (VaR)
  • The candidate can interpret commodity futures prices
  • The candidate can carry our optimal price risk hedging using futures and options

General competence:

  • The candidate is capable of applying the knowledge gained in the course to undertake a rudimentary fundamental analysis of commodity markets.
  • The candidate is able to communicate and report the fundamental characteristics of a market.
  • The candidate is able to interpret and undertake data analysis of commodity markets and their prices
  • The candidate is able to report how storage relates to the commodity and futures market
  • The candidate can interpret and communicate market-based price risk hedging

Required prerequisite knowledge

None

Recommended prerequisites

IND500 Investment Analysis

Exam

Form of assessment Weight Duration Marks Aid
Written exam 1/1 4 Hours Letter grades Calculator

Written exam on campus, using pen and paper.

Coursework requirements

Three mandatory exercises
Three mandatory assignments must be accepted before a candidate is allowed to take the exam.

Course teacher(s)

Course teacher:

Atle Øglend

Course teacher:

Roy Endre Holsvik Dahl

Course teacher:

Andreea-Laura Cojocaru

Head of Department:

Tore Markeset

Overlapping courses

Course Reduction (SP)
Economics of Energy Markets (MØA285_1) 5

Open for

Admission to Single Courses at the Faculty of Science and Technology
Industrial Economics - Master of Science Degree Programme Industrial Economics - Master of Science Degree Programme, Five Year
Exchange programme at Faculty of Science and Technology

Course assessment

There must be an early dialogue between the course supervisor, the student union representative and the students. The purpose is feedback from the students for changes and adjustments in the course for the current semester.In addition, a digital subject evaluation must be carried out at least every three years. Its purpose is to gather the students experiences with the course.

Literature

The syllabus can be found in Leganto