FINANCIAL RISK MANAGEMENT
2025-2026
This summary is based on the topics covered in the Financial Risk Management course taught by Prof. De Ceuster at
the Faculty of Business and Economics at the University of Antwerp. It covers the material from all the lecture videos
made available via EduCloud.
1
,Introduction
1. Different kinds of risks
Market risk = the risk that financial variables in the market change
Credit risk = the risk that there will be a default by the borrower of funds, to that the interest and principal are not paid to
the lender as promised (determines the interest rate)
Operational risk = the risk that systems or processes might fail
Systemic risk = the risk that a default by one financial institution will create a ‘‘ripple effect’’ that leads to defaults by other
financial institutions and threatens the stability of the financial system.
2. Different kinds of products
Linear products = products where the holder of the product can win or lose
→ zero-sum game
Non-linear products = products where one party gets a gain and the other party loses
→ kinked pay-off profile (eg. options)
2
,CLASS 1: introduction to derivatives
Section 1: Derivatives
1. What are derivatives?
Characteristics of derivatives
● derive value: value of derivative is a function of the underlying
→ underlying can be tradable (eg. financial instruments) or non-tradable (eg. index, temperature ...)
● uncertainty about future cash flows
Derivative = contingent claim = instrument whose payoff depends on one or several other uncertain underlying variables
→ eg. forwards and futures, swaps, options, real options … while bonds and equity are not derivatives
Other derivative classifications
● based on the underlying
○ equity derivatives (stock)
○ interest rate derivatives (eg. EURIBOR)
○ currency derivatives (eg. value written on the dollar)
○ commodity derivatives (eg. electricity)
○ credit derivatives
○ property derivatives
● based on the nature of the market
→ exchange traded, OTC (Over The Counter, outside of an exchange)
1.1 Importance of derivatives
Derivatives are the biggest financial markets we have
● swap markets are larger than the GDP of large countries
● biggest financial markets with outstanding notionals that are a multiple of world GDP
A lot of people use derivatives
● derivatives enable us to transfer risks efficiently (eg. hedging, arbitrage)
Many financial products have embedded derivatives
● embedded derivatives: bonds, structured products, …
● eg. you buy a 30-year treasury bond with the option for the state to buy the bond back after 15 years at
a fixed price (embedded call option) so you actually buy a portfolio of a bond and an option
In capital budgeting, real options allow enhanced NPV calculations by including value creation through flexibility
● real call options: option to wait, option to expand or shrink, option to grow
● real put options: option to stop, option to change input or output
1.2 Users of derivatives
A lot of people use derivatives
● hedgers = person who enters into financial contracts to reduce risk from price fluctuations with the goal
of protecting their investments from potential losses by offsetting price volatility
● speculators = person who bets on future movements in the price of an asset hoping to make a profit
● arbitrageurs = person who simultaneously buys and sells financial instruments in different markets or in
derivative forms to take advantage of differing prices for the same asset in two different markets
3
, Section 2: Spot contracts, forwards, futures and swaps
1. The spot contract
Spot contract = an agreement concluded today in which two counterparties agree to buy or sell a well specified asset at a
certain price with an almost immediate delivery and payment (max. within 3 days)
If you hold an asset, you have a long position in that asset (buyer). You will gain if the asset price increases.
Short selling allows you to take a short position (seller). You will gain if the asset price decreases.
→ short selling = selling borrowed securities (on an up-tick, except for indices) by security lending or a repo
Payoff = CF at a certain moment T in the future
S = spot price at maturity
If you have an asset, you will sell it at a future price at
which it is traded on the exchange market.
e.g. you buy something at €20 and sell it at €30
● profit = 30 - 20 = 10
● payoff = 30 (unaffected by past costs)
45° degree line
→ if the share value increases with €1, the value of the
spot contract will also increase by €1
2. The forward contract
Forward contract = an agreement concluded between two counterparties in the OTC market in which they agree to
buy or sell an underlying asset at a certain time in the future (maturity date) for a contracted delivery price
● delivery price is determined at time 0, but will be paid at time T
● forward contracts can only be purchased at a financial institution (OTC), not exchange traded
Positions
● long = obligation to buy
● short = obligation to sell
The value of the contract is 0 because there is no premium paid at the moment of concluding the contract.
● the value of the underlying is the spot price at moment T
→ net CF of the forward contract = ST - DP0 where ST is uncertain
● dangerous: if something uncertain happens, you can’t do anything because you have an agreement
Who wins at moment T?
● if ST (spot price at time T) has risen during the period between “now” and “T”, the seller loses
→ DP0 (delivery price) < ST
● if ST has dropped during the period between “now” and “T”, the buyer loses and the seller wins
→ DP0 > ST
4
2025-2026
This summary is based on the topics covered in the Financial Risk Management course taught by Prof. De Ceuster at
the Faculty of Business and Economics at the University of Antwerp. It covers the material from all the lecture videos
made available via EduCloud.
1
,Introduction
1. Different kinds of risks
Market risk = the risk that financial variables in the market change
Credit risk = the risk that there will be a default by the borrower of funds, to that the interest and principal are not paid to
the lender as promised (determines the interest rate)
Operational risk = the risk that systems or processes might fail
Systemic risk = the risk that a default by one financial institution will create a ‘‘ripple effect’’ that leads to defaults by other
financial institutions and threatens the stability of the financial system.
2. Different kinds of products
Linear products = products where the holder of the product can win or lose
→ zero-sum game
Non-linear products = products where one party gets a gain and the other party loses
→ kinked pay-off profile (eg. options)
2
,CLASS 1: introduction to derivatives
Section 1: Derivatives
1. What are derivatives?
Characteristics of derivatives
● derive value: value of derivative is a function of the underlying
→ underlying can be tradable (eg. financial instruments) or non-tradable (eg. index, temperature ...)
● uncertainty about future cash flows
Derivative = contingent claim = instrument whose payoff depends on one or several other uncertain underlying variables
→ eg. forwards and futures, swaps, options, real options … while bonds and equity are not derivatives
Other derivative classifications
● based on the underlying
○ equity derivatives (stock)
○ interest rate derivatives (eg. EURIBOR)
○ currency derivatives (eg. value written on the dollar)
○ commodity derivatives (eg. electricity)
○ credit derivatives
○ property derivatives
● based on the nature of the market
→ exchange traded, OTC (Over The Counter, outside of an exchange)
1.1 Importance of derivatives
Derivatives are the biggest financial markets we have
● swap markets are larger than the GDP of large countries
● biggest financial markets with outstanding notionals that are a multiple of world GDP
A lot of people use derivatives
● derivatives enable us to transfer risks efficiently (eg. hedging, arbitrage)
Many financial products have embedded derivatives
● embedded derivatives: bonds, structured products, …
● eg. you buy a 30-year treasury bond with the option for the state to buy the bond back after 15 years at
a fixed price (embedded call option) so you actually buy a portfolio of a bond and an option
In capital budgeting, real options allow enhanced NPV calculations by including value creation through flexibility
● real call options: option to wait, option to expand or shrink, option to grow
● real put options: option to stop, option to change input or output
1.2 Users of derivatives
A lot of people use derivatives
● hedgers = person who enters into financial contracts to reduce risk from price fluctuations with the goal
of protecting their investments from potential losses by offsetting price volatility
● speculators = person who bets on future movements in the price of an asset hoping to make a profit
● arbitrageurs = person who simultaneously buys and sells financial instruments in different markets or in
derivative forms to take advantage of differing prices for the same asset in two different markets
3
, Section 2: Spot contracts, forwards, futures and swaps
1. The spot contract
Spot contract = an agreement concluded today in which two counterparties agree to buy or sell a well specified asset at a
certain price with an almost immediate delivery and payment (max. within 3 days)
If you hold an asset, you have a long position in that asset (buyer). You will gain if the asset price increases.
Short selling allows you to take a short position (seller). You will gain if the asset price decreases.
→ short selling = selling borrowed securities (on an up-tick, except for indices) by security lending or a repo
Payoff = CF at a certain moment T in the future
S = spot price at maturity
If you have an asset, you will sell it at a future price at
which it is traded on the exchange market.
e.g. you buy something at €20 and sell it at €30
● profit = 30 - 20 = 10
● payoff = 30 (unaffected by past costs)
45° degree line
→ if the share value increases with €1, the value of the
spot contract will also increase by €1
2. The forward contract
Forward contract = an agreement concluded between two counterparties in the OTC market in which they agree to
buy or sell an underlying asset at a certain time in the future (maturity date) for a contracted delivery price
● delivery price is determined at time 0, but will be paid at time T
● forward contracts can only be purchased at a financial institution (OTC), not exchange traded
Positions
● long = obligation to buy
● short = obligation to sell
The value of the contract is 0 because there is no premium paid at the moment of concluding the contract.
● the value of the underlying is the spot price at moment T
→ net CF of the forward contract = ST - DP0 where ST is uncertain
● dangerous: if something uncertain happens, you can’t do anything because you have an agreement
Who wins at moment T?
● if ST (spot price at time T) has risen during the period between “now” and “T”, the seller loses
→ DP0 (delivery price) < ST
● if ST has dropped during the period between “now” and “T”, the buyer loses and the seller wins
→ DP0 > ST
4
