Ateneo - UPO

The course aims to propose conceptual schemes and operational tools for the management of market risks related to the activity of business operators in the industrial, agricultural and trade sectors. Ample space is given to trading hedging derivatives, whether they are listed or structured on demand. About two thirds of the course is devoted to concrete numerical examples and case studies based on real data. The student will become familiar with the techniques proposed both in the context of the offer by financial operators and in that of the demand from corporate customers.

Teaching materials will be provided by the lecturers (Roncoroni, A. (2023), Lecture notes; slides). Suggested readings: • Hull, J. C., Opzioni, Futures e altri Derivati. Edizione italiana a cura di Emilio Barone. XI ed., Pearson Education
• Leppard, S. (2005), Energy Risk Management. Risk Publications, London.
• McDonald, R.L. (2013), Derivatives Markets. Pearson.
• Pilipovic, D. (2007), Energy Risk Valuing & Managing Energy Derivatives, McGraw-Hill.
• Pirrong, C. (2014), The Economics of Commodity Trading Firms. Trafigura.
• Poitras, G. (2013), Commodity Risk Management: Theory and Application, Routledge.
Further readings:
• Roncoroni, A., Fusai, G., Cummins, M. (2015): Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management, Wiley Finance.
• Roncoroni, A., I.Brik, R. (2017). Hedging Size Risk: Theory and Application to the US Gas Market. Energy Economics 64, 415-437.

By the end of the course, the student will be able to identify and choose the most suitable strategies and derivative tools for market risk management. Additionally, they will acquire the necessary expertise to evaluate some of the main derivative instruments (eg: swaps, forwards, options) and independently judge under what conditions it is convenient to enter a position in such contracts.

Basic knowledge of financial mathematics, equivalent to the contents of the first module of the course "Metodi Matematici II" (CLEA)

Lectures

Attendance is not mandatory but is strongly recommended

Written exam at the end of the teaching module

Introduction to derivatives: general principles, characteristics of contracts, main instruments, purposes and areas of use. Different perspectives: the point of view of the consumer and that of the producer, long and short positions. Forward and futures contracts: definition, futures market, conventions for calculating days, differences between forward and futures, areas of application. Hedging strategies through forward. Forward Rate Agreements (FRA): definition, FRA valuation, examples of hedging by FRA, transforming of assets (resp. liabilities) using FRA. Swaps: Interest Rate Swaps (IRS) mechanism, nature of swap rates, IRS valuation; currency swaps. Cracking hedge. Quanto. Option contracts: options market mechanisms, options types, vanillas and rebates, options hedging policies, spreads, straddles, strangles, collars. Non-linear complex packages: 3-way, by-down, slippage, participation, basketball. Hedging strategy construction: optimal ratios, options hedges; bespoke hedging: mean-variance hedging.
Examples of hedging in commodities markets: shipping freights hedging, oil cargo hedging and contango capturing, commodity and FX joint hedging.
Case studies: optimal hedging using options with basis and production risk; Bespoke hedging a gas retailer position; integrated risk management of a newsvendor; marking-to-market to corporate coal portfolio.

The student will acquire an adequate knowledge of the main implications related to market risk. They will know the main derivative instruments that allow optimal hedging. They will be able to evaluate some derivative instruments and will acquire sufficient autonomy of judgment to identify their scope and conditions of applicability.