Derivatives and Risk Management

FIE425 Derivatives and Risk Management

Autumn 2021

  • Topics


    • Pricing by replication in the absence of arbitrage possibilities.
    • Binomial model of derivative pricing.
    • Black and Scholes model of derivative pricing.
    • Pricing of derivatives by Monte Carlo simulation.
    • Forward/futures.
    • Options.
    • Exotic options
    • American/European/Asian types of derivatives.
    • Hedging/replication/risk management
    • If time allows: Value at Risk, credit risk.

  • Learning outcome


    The course provides knowledge about the basic  derivative instruments, the principles of derivative pricing and how such instruments  are used in risk management. Students understand pricing by arbitrage.




    • know how to replicate any derivative instrument's cashflow either by other derivatives or by so-called underlying assets.
    • can apply specific models based on no-arbitrage  pricing theory to value new kinds of derivative instruments.
    • suggest proper use of derivatives for various hedging situations.

    General competence

    A student will be able to  communicate knowledge, both written and orally to both academic and market specialists of derivatives and to assess  risk connected to the use of basic derivatives.

  • Teaching

    Regular classes 2x 45 minutes once a week, which will be recorded.Some lectures may be substituted with digital zoom, also recorded .Some shorter instructional videos may be made available.

    Active student participation is strongly encouraged.

    Teaching language is English.

  • Requirements for course approval

    One approved problem set - to be solved in groups and presented in class.

  • Assessment

    Final exam, comprising a 4 hour individual written take home exam. The final exam must be written in English.

  • Grading Scale

    Grading scale A-F.

  • Computer tools

    Familiar with spreadsheets. Knowledge of programming languages (R, C++, etc) are not required for this class, but may be an advantage. Examples of computer code are used for instructional purposes.

  • Literature

    Robert L. McDonald, Derivatives Markets, 3rd edition.

    Additional notes and papers distributed via Canvas.


ECTS Credits
Teaching language

Autumn. Offered Autumn 2021.

Course responsible

Professor Svein-Arne Persson, Department of Finance, NHH