SDST3618 Derivatives and risk management (6 credits) Academic Year 2025
Offering Department SCDS (Department of Statistics and Actuarial Science) Quota ---
Course Co-ordinator Prof M Zhu, SCDS (Department of Statistics and Actuarial Science) < ugenq@hku.hk >
Teachers Involved (Prof M Zhu,Statistics & Actuarial Science)
Course Objectives Nowadays all risk managers must be well versed in the use and valuation of derivatives. The two basic types of derivatives are forwards (having a linear payoff) and options (having a non-linear payoff). All other derivatives can be decomposed to these underlying payoffs or alternatively they are variations on these basic ideas. This course aims at demonstrating the practical use of financial derivatives in risk management.  Emphases are on pricing and hedging strategies, and the no-arbitrage principle.
Course Contents & Topics Review of futures, forwards and options and the no-arbitrage principle; hedging strategies using futures; pricing of forwards and futures; interest rate futures and swaps; trading strategies using options; put-call parity; valuation of European and American options using the binomial-tree model; valuation of European and American options using the Black-Scholes option pricing model; the Greeks: their calculation and interpretation; implied volatility; delta hedging and the role of market-makers; exotic options: Asian options, barrier options, compound options, gap options and exchange options.
Course Learning Outcomes
On successful completion of this course, students should be able to:

CLO 1 use futures, forwards, options and swaps to formulate financial strategies
CLO 2 determine the payoff and the value of various derivative products using binomial tree and Black-Scholes formula
CLO 3 explain how derivative products can be used as tools to manage financial risk
CLO 4 recognize how to decompose complicated derivatives into a portfolio of standard derivatives
Pre-requisites
(and Co-requisites and
Impermissible combinations)		 Pass in SDST3615; and
Not for students who have passed or already enrolled in any of the following courses: FINA2322, MATH3906, SDST3905; and
Not for BSc(Actuarial Science) students.
Only for students admitted in 2025 and thereafter.
Course Status with Related Major/Minor /Professional Core 2U000C00 Course not offered under any Major/Minor/Professional core
2024 Major in Risk Management ( Disciplinary Elective )
2024 Minor in Risk Management ( Disciplinary Elective )
2023 Major in Risk Management ( Disciplinary Elective )
2023 Minor in Risk Management ( Disciplinary Elective )
2022 Major in Risk Management ( Disciplinary Elective )
2022 Minor in Risk Management ( Disciplinary Elective )
2021 Major in Risk Management ( Disciplinary Elective )
2021 Minor in Risk Management ( Disciplinary Elective )
Course to PLO Mapping 2024 Major in Risk Management < PLO 1,2,3,4,5 >
2023 Major in Risk Management < PLO 1,2,3,4,5 >
2022 Major in Risk Management < PLO 1,2,3,4,5 >
2021 Major in Risk Management < PLO 1,2,3,4,5 >
Offer in 2025 - 2026 Y        2nd sem    Examination May     
Offer in 2026 - 2027 Y
Course Grade A+ to F
Grade Descriptors
A Demonstrate thorough mastery at an advanced level of extensive knowledge and skills required for attaining all the course learning outcomes. Show strong analytical and critical abilities and logical thinking, with evidence of original thought, and ability to apply knowledge to a wide range of complex, familiar and unfamiliar situations. Apply highly effective organizational and presentational skills.
B Demonstrate substantial command of a broad range of knowledge and skills required for attaining at least most of the course learning outcomes. Show evidence of analytical and critical abilities and logical thinking, and ability to apply knowledge to familiar and some unfamiliar situations. Apply effective organizational and presentational skills.
C Demonstrate general but incomplete command of knowledge and skills required for attaining most of the course learning outcomes. Show evidence of some analytical and critical abilities and logical thinking, and ability to apply knowledge to most familiar situations. Apply moderately effective organizational and presentational skills.
D Demonstrate partial but limited command of knowledge and skills required for attaining some of the course learning outcomes. Show evidence of some coherent and logical thinking, but with limited analytical and critical abilities. Show limited ability to apply knowledge to solve problems. Apply limited or barely effective organizational and presentational skills.
Fail Demonstrate little or no evidence of command of knowledge and skills required for attaining the course learning outcomes. Lack of analytical and critical abilities, logical and coherent thinking. Show very little or no ability to apply knowledge to solve problems. Organization and presentational skills are minimally effective or ineffective.
Communication-intensive Course N
Course Type Lecture-based course
Course Teaching
& Learning Activities
Activities Details No. of Hours
Lectures 36.0
Tutorials 12.0
Reading / Self study 100.0
Assessment Methods
and Weighting
Methods Details Weighting in final
course grade (%)		 Assessment Methods
to CLO Mapping
Assignments Coursework (assignments, tutorials, and class test(s)) 40.0 1,3
Examination One 2-hour written examination 60.0 1,2,3,4
Required/recommended reading
and online materials		 McDonald, R. L. (2013). Derivatives Markets (3rd Edition). Pearson.
Hull, J. C. (2018). Options, Futures, and Other Derivatives (10th Edition). Pearson.
Hull, J. C. (2018). Risk Management and Financial Institutions (5th Edition). Wiley.
Course Website http://moodle.hku.hk
Additional Course Information NIL