Finance II

COURSE OBJECTIVE
In this course you will learn about modelling of financial risks and financial derivatives.

In the first part of the course, the central concept is the relationship between risk and return of financial assets. The goal is to gain
insights into the risks associated with financial portfolios and investments and to be able to calculate/estimate such risks. Furthermore, another goal is to learn how to construct portfolios on the basis of mean-variance optimization and how to benefit from diversification possibilities. Finally, you will also learn how to compute expected returns on investments and the cost of capital on the basis of the Capital Asset Pricing Model and multifactor models. (Academic and Research Skills, Bridging Theory and Practice -
Application)

In the derivatives module, the goal is to gain insight into various financial derivatives such as futures and options, their properties,
valuation and risks associated with them. Another goal is to learn how these derivatives can be valued and can be used to hedge financial
risks. (Academic and Research Skills, Bridging Theory and Practice - Application)

By accomplishing these learning goals, you will gain new academic and research skills and develop your professional knowledge in the area of financial risk and derivatives. Furthermore, by illustrating the concepts with examples of portfolios, investments and hedging problems provided by financial institutions, we will bridge the gap between theory and practice, enabling you to translate theoretical concepts into practical applications.

COURSE CONTENT
Central topics in financial modelling that will be discussed are:
- trade-off between risk and return;
- estimation of average return and volatility;
- concepts of covariance and correlation and their estimation;
- risk and return of portfolios;
- diversification;
- Value-at-Risk and Expected Shortfall;
- concept of efficient portfolios;
- CAPM and multifactor models;
- Cost of capital.

Central topics in the part on derivatives that will be discussed are:
- types and characteristics of financial derivatives such as futures, forwards and options;
- use of derivatives in risk hedging;
- principle of no arbitrage;
- determining option price with the help of the binomial tree;
- sensitivities of options (Greeks);
- Black-Scholes model for option pricing and its assumptions;
- delta hedging of options;
- implied volatilities and volatility smiles.

TEACHING METHODS
Lectures.
Tutorials.

TYPE OF ASSESSMENT
Written test, exam and computer assignment.

ENTRY REQUIREMENTS
Finance I and Quantitative Research Methods I and II.