EBF 473 - Risk Management in Energy Industries
This is a sample syllabus.
This sample syllabus is a representative example of the information and materials included in this course. Information about course assignments, materials, and dates listed here is subject to change at any time. Definitive course details and materials will be available in the official course syllabus, in Canvas, when the course begins.
Overview
All major firms engage in financial risk management. In this course, we will learn the basics of how firms can use financial instruments to manage their financial risk. In particular, we will focus on risk management with respect to threats to financial viability from the weather. Specific topics to be covered include the structure and pricing of options, the theory of arbitrage, financial statistics and the use of options to hedge financial risk.
Objectives
Students who excel in this course are able to:
- identify the properties of options, how options pay off and how to use options in combinations to reduce financial risk;
- calculate basic financial statistics: in particular how to use variance and covariance to calculate the risk of financial portfolios;
- explain why firms seek to reduce financial risk;
- create a strategy to engage in arbitrage (making money without investing money) by using financial leverage and the ability to go short to buy low prices assets and to sell high priced assets;
- determine the value of options using the Black-Scholes option pricing formula;
- calculate the implicit volatility of financial assets;
- use options to reduce financial risks from changes in commodity and stock prices and therefore increase the financial viability of your company;
- calculate the “greek” parameters for options and learn how to hedge portfolios against the risk of large price changes;
- explain how the ability to go short in financial assets reduces the likelihood of financial “bubbles”;
- use weather derivatives to reduce financial risks for firms impacted by the weather.
Required Materials
The materials listed here represent those that may be included in this course. Students will find a definitive list in the course syllabus, in Canvas, when the course begins.
Hull, Options, Futures, and Other Derivatives (any recent edition is fine).
Prerequisites
Statistics course: either EBF 472, STAT 301, or STAT 401 and
Math course: either MATH 140 (ECON 102 and MATH 230) or (EBF 200 and EBF 301).
Expectations
We have worked hard to make this the most effective and convenient educational experience possible. How much and how well you learn is dependent on your attitude, diligence, and willingness to ask for clarifications or help when you need them. We are here to help you succeed. Please keep up with the class schedule and take advantage of opportunities to communicate with us and with your fellow students. You can expect to spend an average of 8 - 10 hours per week on class work.
Major Assignments
- Homework (27% of total course grade)
- Mid-term (32% of total course grade)
- Final (41% of total course grade)
Course Schedule
| Week | Topic | Assignment |
|---|---|---|
| 1 | Introduction to Derivatives. What are calls and puts?
| Homework 1 |
| 2 | Statistics and Portfolios Introduction to basic financial statistics | - |
| 3 | Long-term Capital Management How LTCM forgot about basic statistics, lost a few billions of dollars, and almost dragged down the world's financial system | Homework 2 |
| 4 | Properties of Options Features of those wacky calls and puts | - |
| 5 | The Binomial Option Model Here we start to learn how to price options | - |
| 6 | The Black Scholes Model Learn how the pros price options. | Homework 3 |
| 7 | Implicit Volatility and Delta Hedging Where does that sigma in the Black-Scholes-Formula come from? How to hedge option risk Part I. | Midterm Exam |
| 8 | Nick Leeson and Gamma Hedging How rogue trader Nick Leeson fooled the computers and brought Barings Bank to Bankruptcy; How to Defeat NIck's strategy | Homework 4 |
| 9 | Financial Bubbles and Going Short Bubbles happen when the prices of financial assets clearly rise above the efficient market price. Here we learn why this happens, and why short selling is important for market efficiency. | Homework 5 |
| 10 | Economics of Structured Finance Structured finance was a clever method to make home mortgages more marketable. But because the financial wizards forgot about correlation, structured finance led to the Crash of 2008. | - |
| 11 | Weather Derivatives Yes, you can even hedge the risk from the weather. Here you will learn how. | Homework 6 |
| 12 | Application of Weather Derivatives Yes, you can even hedge the risk from the weather. Here you will learn how. | - |
| Final Exam | ||