COURSE NUMBER: EWMBA237.1

This course is cross-listed with the FTMBA Program

COURSE TITLE: Corporate Risk Management and Valuation using Derivatives

UNITS OF CREDIT: 2.0

INSTRUCTOR: Nicolae Garleanu

E-MAIL ADDRESS: garleanu@haas.berkeley.edu

CLASS WEB PAGE LOCATION: http://bspace.berkeley.edu

MEETING DAY(S)/TIME: Tuesdays, 6:00PM – 9:30PM (10 weeks, September 2-November 4)

PREREQUISITE(S): EWMBA203

CLASS FORMAT: Lectures and short cases

REQUIRED READINGS: Lecture notes, additional material posted on line; textbook readings recommended

BASIS FOR FINAL GRADE: Midterm and final examinations, class participation, problem sets (homework)

ABSTRACT OF COURSE'S CONTENT AND OBJECTIVES: The derivative class is the largest asset class worldwide, comprising securities worth more than $35 trillion and laying claim to assets worth almost $600 trillion. (In contrast, the total value of all publicly traded companies in the world is around $50 trillion.) The extraordinary size and growth of this class owe to the usefulness of derivatives as instruments for taking tailored risk positions. For example, a gold miner can (pay a price to) eliminate the risk it has to sell gold below $800/oz; an investor bullish on Microsoft can take a position that pays off when the price of Microsoft climbs to a value between $30 and $35, but not otherwise; a European exporter can shield itself against revenues dropping due to the rise of the Euro above $1.60; a bond investor can pass the default risk in its bond portfolio to another, perhaps more risk tolerant, investor; etc. In addition, the main features of derivatives characterize all common corporate securities and numerous other financial contracts – for instance, the contracts used by the US government to inject cash in various firms in 2008-2009.

The main goals of the course are that students learn: (i) what derivatives are, (ii) how to use derivatives, and (iii) how to price derivatives.

The course is going to introduce a large number of derivatives, starting with the standard ones – futures, forwards, swaps, and plain-vanilla options – and continuing with more “exotic” ones – exotic options, credit default swaps (CDS), asset-backed securities (e.g., MBS, CDO), etc. A very important aspect of the course is the fair pricing of derivatives; based on the notion of “no arbitrage”, the course will derive the correct price for the derivatives studied, which will involve building models of the statistical behavior of underlying-asset (e.g., equity, currency, or commodity) prices. These models also allow precise statements concerning the correct derivative position to take in order to achieve a particular risk exposure, whether motivated by speculative or hedging reasons. The course will introduce precise metrics for the evaluation of a portfolio's risk, ranging from the classical ones, such as variance or beta, to ones developed more recently, such as value at risk (VaR).