EBF 473 - Risk Management in the Earth Sciences

Instructor: George S. Young, Class times: TR 10:35 - 11:50 in 112 Walker, Teaching assistants: Leah LaughlinMansour Almohaya

EBF 473 - Risk Management in the Earth Sciences: Analysis of strategies for mitigating business risk from market, atmospheric, geophysical uncertainties including the use of energy/mineral commodity futures/options, weather derivatives, and insurance.

Prerequisite - MSIS 200 or STAT 200 or E B F 472 

University Prerequisite Policy: Students who do not meet these prerequisites may be disenrolled according to Administrative Policy C-5 if they do not have the proper prerequisite override. Students who add the course after being disenrolled according to this policy are in violation of Item 15 on the Student Code of Conduct: http://studentaffairs.psu.edu/conduct/codeofconduct/.

Fall 2016 - TR 10:35 - 11:50 in 112 Walker

Instructor: George S. Young, 620 Walker, 3-4228, [email protected]. Office Hours: 3:00 - 4:00 TR 

Teaching assistants: Leah Laughlin, Mansour Almohaya 

Overview: All major firms engage in financial risk management. In this course, we will learn the basics of how firms can use financial instruments to manage their financial risk. In particular, we will focus on risk management with respect to threats to financial viability from the weather. This course will be both challenging and highly practical. 

Text: Hull, Options, Futures, and Other Derivatives (any edition from 6th onwards is fine).

Assistance with Textbooks: Penn State honors and values the socioeconomic diversity of our students. If you require assistance with the costs of textbooks for this course, contact the Office of Student and Family Services (120 Boucke Building, 863-4926, http://studentaffairs.psu.edu/familyservices/). For additional need related to socioeconomic status please visit http://sites.psu.edu/projectcahir.

Internet materials: Lectures, homework, quizzes, study guides and old exams/quizzes are on the course Angel site

Course Expectations (i.e. Objectives)

This course is designed to give you the basic underpinnings of financial risk management and help prepare you for a career in this area. Specific topics reviewed include: 

  1. Properties of options
  2. Basic financial statistics
  3. Arbitrage (making money without investing money)
  4. Determining the value of options
  5. How to use options to reduce financial risks. 

Understanding each of these areas is important for a successful career in the energy industry. 

An additional goal for this class is for you to become more familiar with how to present your work in a professional manner. Thus, all answers will be expected to be complete, and all work fully shown. 

Lecture notes will be posted to the ANGEL site. Reading assignments are also located on the ANGEL site. Do not send me e-mail through ANGEL; rather use my PSU account, [email protected], as I do not check ANGEL mail regularly.

Course Content

Topic/Readings

  • Review of Financial Statistics/Lecture notes
  • Mechanism of Options Markets/Hull, Chapter 8
  • Financial Statistics and the Collapse of Long-Term Capital Management (1998)/“Long-Term Capital Mismanagement,” pages 218-274 in Marthinsen, Risk Takers
  • Properties of Stock Options/Hull, Chapter 9
  • The Binomial Option Model/Hull, Chapter 11
  • The Black Sholes Model/Hull, Chapter 12
  • Midterm
  • Delta Hedging, Nick Leeson and the Collapse of Barings Bank (1994), and Delta-Gamma Hedging/Chapter 17, Hull Kolb and Overdahl, pages 142-147
  • Implicit Volatility and the Volatility Smile/Hull, Chapter 13.11, Chance, Appendix to Chapter 5
  • Going Short and the 1999-2000 Internet Bubble/Lamont, “Short-Sale and Overpricing”
  • Real Options/Hull, Chapter 35
  • Weather Derivatives/Considine, “Introduction to Weather Risk Management”, Young, “Pricing Electricity from Probabilistic Weather Forecasts”, In Nature’s Casino by Michael Lewis http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=all&_r=0

All readings outside the Hull text and the NY Times article will be posted on the course ANGEL site. 

Preliminary Assignment Schedule (subject to change) 

  • Tuesday, August 23: First Class
  • Tuesday, August 25: Students choose groups for group quizzes.
  • Tuesday, August 30: First group quiz
  • Thursday, September 1: First solo quiz
  • Thursday, September 8: Homework 1 due
  • Thursday, September 22: Homework 2 due
  • Tuesday, October 4: Homework 3 due
  • Thursday, October 13: Homework 4 due
  • Tuesday, October 18: Review Session for Midterm Exam
  • Thursday, October 20: Mid-term
  • Tuesday, November 3: Homework 5 due
  • Thursday, November 17: Homework 6 due
  • Tuesday and Thursday, November 22 and 24: Thanksgiving Break!
  • Thursday, December 8: Homework 7 due, Review Session for Final Exam 

The final exam has not yet been scheduled by the University. 

Grading mistakes happen. So if you think your work was graded incorrectly, please ask the instructor. But make sure to check with the grader first. This saves a lot of trouble. 

Course Policies including: Assessment policy, examination policy and grading policy 

  • Homework (7)             30%
  • Solo quizzes                 9%
  • Group quizzes              9%
  • Mid-term exam            26%
  • Final Exam                  26%

Course average will be graded on a 90/80/70 (A/B/C/D+F) scale. 

There is no extra credit in this class besides that discussed in the paragraph below. The mid-term exam is scheduled for October 20 in class. The final exam is currently unscheduled. The mid-term and final will be closed book, no notes. Both the mid-term and the final will consist of five mathematical problems. The final will NOT be cumulative. Previous exams have been made available on Angel. 

Your homework grade will be calculated as the average of your six highest homework scores. (So your lowest homework score gets dropped.) Any individual homework score will be increased by 10% if you hand it into my office by 4:00PM the day before it is due. (So, for example, if the homework you handed a day early in receives an 86, you will receive a score of 94.6 on that particular homework.) Please type your homework and submit them in paper form using one side of the page (no electronic submissions), showing all your work. Graphs should be done using EXCEL. Also, you should familiarize yourself with the EXCEL “COPY” command. No late homework will be accepted.

It is very important to keep up to date on the material. Trying to “cram” in the class work right before an exam will not be successful. To give you additional incentives to keep up with the class, most class periods will end with a short quiz. These quizzes will be open book, open notes. 

Thus, most Thursday classes will end with students asked individually answer one question based on the previous lecture. Most Tuesday classes will end with a group quiz of one question based on the previous lecture. The instructor will assign a problem and the several groups in the class will work on the problem. Each group will hand in an answer to be graded. Students will choose their groups the third day of class, and should sit together with their group. Choose your group wisely! You will be responsible for the outcome.  These quizzes will be open book, open notes. 

Both Tuesday and Thursday quizzes will be based on the most important points from the previous class’ lecture. Thus, it should be straightforward to figure out what is likely to be on these quizzes. Put another way, if you are surprised by a question on a daily quiz, you most likely have made a mistake. 

Please bring a calculator to class every single session. 

Academic Integrity: This course adopts the academic integrity policy of the EMS College, which is described at http://www.ems.psu.edu/students/integrity/statement.html. Briefly, students are expected to do their own problem sets and to work the exams on their own. Class members may work on the problem sets in groups, but then each student must write up his or her answers separately. Students may not copy problem set or exam answers from another person's paper and present them as their own even if you worked together to figure out how to solve the problem. Students who present other people's work as their own, as well as the students providing the answers, will receive at least a 0 on the assignment and may well receive an F in the course.

Every so often, we see that on the homework one or more students have copied the files of another student. This is easy to spot, and deal with. 

Please see: Earth and Mineral Sciences Academic Integrity Policy: http://www.ems.psu.edu/current_undergrad_students/academics/integrity_policy, which this course adopts. To learn more, see Penn State's "Plagiarism Tutorial for Students."

Course Copyright: All course materials students receive or to which students have online access are protected by copyright laws. Students may use course materials and make copies for their own use as needed, but unauthorized distribution and/or uploading of materials without the instructor’s express permission is strictly prohibited. University Policy AD 40, the University Policy Recording of Classroom Activities and Note Taking Services addresses this issue. Students who engage in the unauthorized distribution of copyrighted materials may be held in violation of the University’s Code of Conduct, and/or liable under Federal and State laws.

Accommodations for Students with Disabilities: Penn State welcomes students with disabilities into the University's educational programs. Every Penn State campus has an office for students with disabilities. The Office for Disability Services (ODS) website provides contact information for every Penn State campus: (http://equity.psu.edu/student-disability-resources/disability-coordinator). For further information, please visit the Office for Disability Services website (http://equity.psu.edu/student-disability-resources).

In order to receive consideration for reasonable accommodations, you must contact the appropriate disability services office at the campus where you are officially enrolled, participate in an intake interview, and provide documentation based on the documentation guidelines (http://equity.psu.edu/student-disability-resources/guidelines). If the documentation supports your request for reasonable accommodations, your campus’s disability services office will provide you with an accommodation letter. Please share this letter with your instructors and discuss the accommodations with them as early in your courses as possible. You must follow this process for every semester that you request accommodations. 

Attendance: This course abides by the Penn State Attendance Policy E-11: http://undergrad.psu.edu/aappm/E-11-class-attendance-effective-fall-2016.html, and Conflict Exam Policy 44-35: http://senate.psu.edu/policies-and-rules-for-undergraduate-students/44-00-examinations/#44-35. Please also see Illness Verification Policy: http://studentaffairs.psu.edu/health/welcome/illnessVerification/, and Religious Observance Policy: http://undergrad.psu.edu/aappm/R-4-religious-observances.html. Students who miss class for legitimate reasons will be given a reasonable opportunity to make up missed work, including exams and quizzes.  Students are not required to secure the signature of medical personnel in the case of illness or injury and should use their best judgment on whether they are well enough to attend class or not; the University Health Center will not provide medical verification for minor illnesses or injuries. Other legitimate reasons for missing class include religious observance, military service, family emergencies, regularly scheduled university-approved curricular or extracurricular activities, and post-graduate, career-related interviews when there is no opportunity for students to re-schedule these opportunities (such as employment and graduate school final interviews).  Students who encounter serious family, health, or personal situations that result in extended absences should contact the Office of Student and Family Services for help: http://studentaffairs.psu.edu/familyservices/.  Whenever possible, students participating in University-approved activities should submit to the instructor a Class Absence Form available from the Registrar's Office: http://www.registrar.psu.edu/student_forms/, at least one week prior to the activity. 

Weather Delays: Campus emergencies, including weather delays, are announced on Penn State News and communicated to cell phones, email, the Penn State Facebook page, and Twitter via PSUAlert (Sign up at: https://psualert.psu.edu/psualert/.

Technical Requirements: For this course, we recommend the minimum technical requirements outlined on the Dutton Institute Technical Requirements page (https://www.e-education.psu.edu/techspecs), including the requirements listed for same-time, synchronous communications. If you need technical assistance at any point during the course, please contact the ITS Help Desk (http://itservicedesk.psu.edu). 

Penn State E-mail Accounts: All official communications from Penn State are sent to students' Penn State e-mail accounts. Be sure to check your Penn State account regularly, or forward your Penn State e-mail to your preferred e-mail account, so you don't miss any important information. 

Deferred Grades: If you are prevented from completing this course within the prescribed amount of time, it is possible to have the grade deferred with the concurrence of the instructor. To seek a deferred grade, you must submit a written request (by e-mail or U.S. post) to your instructor describing the reason(s) for the request. It is up to your instructor to determine whether or not you will be permitted to receive a deferred grade. If, for any reason, the course work for the deferred grade is not complete by the assigned time, a grade of "F" will be automatically entered on your transcript. 

Military Personnel: Veterans and currently serving military personnel and/or spouses with unique circumstances (e.g., upcoming deployments, drill/duty requirements, disabilities, VA appointments, etc.) are welcome and encouraged to communicate these, in advance if possible, to the instructor in the case that special arrangements need to be made.

Netiquette: The term "Netiquette" refers to the etiquette guidelines for electronic communications, such as e-mail and bulletin board postings. Netiquette covers not only rules to maintain civility in discussions, but also special guidelines unique to the electronic nature of forum messages. Please review some general Netiquette guidelines that should be followed when communicating in this course. 

Disclaimer Statement: Please note that the specifics of this Course Syllabus can be changed at any time, and you will be responsible for abiding by any such changes. Changes will be posted to the course discussion forum.

REMEMBER, AN OPTION CANNOT HAVE NEGATIVE VALUE!