No prerequisites, but a base knowledge of mathematics and statistics is preferable
The course introduces to the fundamentals of assets’ pricing and risk hedging
strategies, with a particular focus on the role of quantitative models for market, credit, and operational risk in the banking and insurance sectors. The models are discussed in relation to the Basel and Solvency regulatory frameworks for banking institutions and insurance companies, respectively.
Through this module, the students will learn:
- To apply statistical models and market analysis to financial instruments,
from low to high risky assets;
- To estimate risk measures on market data and to classify them based on mathematical, axiomatic properties;
- To develop asset pricing techniques in discrete and continuous time
frameworks;
- To use arbitrage-free fair pricing methods and hedging by portfolio replication;
- The main quantitative frameworks for the analysis and management of credit, market, and operational risk in financial institutions.
- The role of risk models in the Basel (banking) and Solvency (insurance) regulatory frameworks.
Fixed income markets and interest rates derivatives
- Interest rate models and term structure of Interest rates
- Interest rate derivatives (Forward rate agreements, interest rate swaps)
Option markets
- Equity options, trading strategies
- Put-call parity and bounds on the value of options
Pricing
- Risk-neutral pricing
- Binomial model
- Continuous time stochastic processes
- Ito’s lemma
- Black-Scholes-Merton model
- Monte Carlo methods
Risk measures
- Value at Risk and Conditional Value at Risk
- Coherent risk measures
- Taxonomy of risk
Credit risk
- Ratings, default probabilities and recovery rates
- Structural models (Merton and KMV)
- Reduced form models
- Credit portfolio models (Vasicek and Credit Metrics)
Operational risk
- Event types, loss frequency, and severity
- Basic indicator approach, standardized approach, advanced measurement approach
- Operational risk VaR
- Extreme value theory
- Operational risk in Basel, the SMA framework
Basel and Solvency regulation
- Regulatory principles: a brief history
- Market, credit, and operational risk in the Basel regulatory framework
- Sovency II: introduction and characteristics
- Internal model approach for risk in the insurance sector
The teaching takes place through lectures with attention to direct dialogue with the students. Support material will be distributed using the e-learning and Microsoft Teams
Oral exam with theoretical questions and exercises. Up to two extra points to the final exams are awarded for an elective assignment, consisting in reviewing and presenting to the class an academic paper related to the contents of the course.
If the course will be on line or partially on line and partially in presence, changes can be made compared to what is stated in the syllabus to the contents course and exams.