The course introduces to the fundamentals of assets’ pricing and risk hedging
strategies by investors and financial institutions, with a particular focus on the
comprehension of risk sources and their widespread effects in quantitative asset
and asset-liability models.
Through this module, the students will learn:
- To apply statistical models and market analysis to financial instruments,
from low to high risky assets;
- To classify risk measures based on mathematical, axiomatic properties
or relying on economic principles;
- Develop asset pricing techniques in discrete and continuous time
frameworks;
- Decompose assets’ and portfolios’ risk sources, from market to credit
risk;
- learn arbitrage-free fair pricing methods and hedging by portfolio
replication;
- Extend risk analysis to assess enterprise-wide risk management and
apply risk capital evaluation;
- Understand the rationale of risk capital assessment in the banking and
insurance sectors;
- Develop and solve portfolio models under regulatory constraints.
Introduction to financial and derivative markets
- Fixed-income theory and interest rates, Securitization
- Interest rate models and term structure of interest rates
Option markets
- Equity options, currency, compound and stock indices
- Trading strategies
Pricing
- Markov property
- Risk-neutral pricing
- Binomial model
- Black-Scholes-Merton model
- Monte Carlo method
Value at Risk and Conditional Value at Risk
Credit risk
- Ratings, default probabilities and recovery rates
- Credit risk in derivatives deals
- Default correlation
- Risk assessment and economic cycle: regulatory pro-cyclical effects
- Credit VaR
Enterprise-wide risk management and regulations
- Regulatory principles: a brief history
- Regulatory frameworks: from Basel II to Basel IV
Risk capital assessment in the insurance sector
- Life and Property and casualty risk sources 13
- Asset-liability management in the insurance sector
- VaR and risk capital evaluation
- Solvency II regulatory framework