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This is the study programme for 2020/2021. It is subject to change.


The development of a pricing formula for options (The Black Scholes formula) was the start of a revolution in finance. The result of this revolution has been a proliferation of market places for trading derivative securities, such as futures and options, and a continued expansion in the risks one can hedge using derivatives. This course develops tools for understanding and using derivatives. First, we discuss the various types of derivatives, and ways to price them. Second, we discuss the ways in which corporations can use derivatives to hedge risks, and, as importantly, when to hedge.

Learning outcome

After successful completion of the course the student will:
Knowledge
  • have basic theoretical knowledge in option pricing theory and models
  • have the ability to apply a variety of option pricing models such as binomial and trinomial trees, analytical solutions such as the Black-Scholes model and Monte Carlo simulation
  • understand the role of risk management tools for hedging market risk exposure, e.g. know how to hedge the price of crude oil

Skills
  • be able to price financial options and other derivatives such as forward and futures contracts
  • be able to identify and price structured products with embedded options
  • be able to apply numerical methods such as Monte Carlo simulation to price derivatives
  • be able to estimate a firm's Value at Risk

Contents

This course covers the valuation and use of options and derivatives for use in the financial, as well as energy and commodities industries. Options and other derivatives are a very important class of financial instruments. Derivatives are financial contracts on other assets (i.e. what we call the "underlying asset") such as the price of a stock, the price of Brent crude oil or the price of natural gas. The values of derivatives such as options are driven by the behavior of its underlying asset. An option to buy a shipment of crude oil in the future is very much affected by the volatility of the price of oil.
The course will provide the theoretical foundation for pricing derivatives and how it differs from standard financial valuation models. Various pricing models will be covered, from binomial models to the Black-Scholes model to Monte Carlo simulation. We will also cover how derivatives can be used as risk management tools. For instance, how can an oil company hedge the risk it faces from the fluctuations of the price of crude oil?

Required prerequisite knowledge

None.

Recommended previous knowledge

The students taking this course will benefit from having a basic understanding of:

- Finance theory

- Microeconomics

- Econometrics

Exam

Weight Duration Marks Aid
Groupwork assignment1/1 Pass - Fail
No re-sit.

Coursework requirements

Mandatory attendance 80%, Research proposal

Course teacher(s)

Course coordinator
Bård Misund

Method of work

The course is delivered as a combination of lectures/seminars and extensive coursework (research projects). The students will work in groups and deliver a series of research reports throughout the semester. All reports need a passing grade.
The course will be delivered in English. The expected workload for the students is 300 hours:
50 hours lectures/seminars/workshops/meetings
250 hours self-study and groupwork

Open to

Master in Accounting and Auditing
Risk Management - Master's Degree Programme (Master i teknologi/siviling.)
Business Administration - Master of Science

Course assessment

Students will have the opportunity to give feedback on the course first in an early dialogue, and then in a written course evaluation at the end of the course.

Literature

Literature is published about 14 days before registration for the course opens


This is the study programme for 2020/2021. It is subject to change.

Sist oppdatert: 22.02.2020