Derivatives and Risk Management

FIE425 Derivatives and Risk Management

Spring 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, as well as regular Zoom meetings.Some shorter instructional videos will 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 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 2020

Course responsible

Professor Svein-Arne Persson, Department of Finance, NHH