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Learning to Hedge Risks in a Changing World

Professor Stefano Giglio teaching

Two years ago, Professor Stefano Giglio created a course to teach students how to manage a variety of risks using financial markets. The class has now expanded to address the risks to investors posed by climate change.

By Karen Guzman

When Professor Stefano Giglio, a finance scholar with interests in asset pricing and market volatility, arrived at the Yale School of Management in 2017, he knew right away that he wanted to create a new course introducing business students to the practical ramifications of research on risk. “Every business school should have a course that teaches you how to manage risks,” he says.

Yale SOM encourages faculty to create new elective courses that can help students dig into rapidly evolving industries and learn about the leading edge of research.

That fall, Giglio’s elective, Speculation and Hedging in Financial Markets, debuted with the goal of teaching students to identify and manage risk—especially in fast-changing circumstances.

Giglio stressed both practical applications and the theoretical underpinnings of hedging risk using options and derivatives. But he didn’t stop there. “It’s useful to understand the theory behind the various financial instruments, but there is also a more general need to understand how to use these instruments in practice to manage risks, not only in derivatives markets, but in all markets,” he says.

The course examines the risks flowing from fluctuations in currency exchange rates and commodities prices, the risk of market crashes, and other forms of uncertainty. It examines risks that both private firms and governments face, whether they go through the derivatives markets or not. And this fall, the course is taking on a new category: climate change risk. “It’s a very, very complex topic but we have some expertise on one side of it, the financial side,” says Giglio, who recently published a paper on the topic. “We don’t know much about how this will all play out, but we need to be smart about it. We need to act very quickly, and the time to move is now.”

Giglio plans to continue updating his curriculum to keep in step with developments impacting global markets. This comprehensive, yet flexible, approach has drawn a growing and diverse group of students. Launched with 30 students in 2017, the class has grown its enrollment to 50 in 2018. “Every year we get students from different disciplines,” Giglio says. “Last year, I had two from the School of Architecture. We all face risk. It’s not like if you’re an architect, you don’t have any risk exposures. An architectural firm has to manage different types of risk every day.”

Guest speakers bring a real-life dimension to the classroom. Among the speakers so far have been practitioners from BlackRock, AQR, and the International Monetary Fund.

Aashna Mehra ’19, a private equity associate with New Energy Capital Partners, says the course was “invaluable” to her. Mehra works in debt, equity, and mezzanine investments in renewable energy companies across North America.

 “The class gave me a nuanced understanding of all sorts of exotic options and provided the building blocks to grasp how financial markets value assets and companies,” she says. “Professor Giglio was one of my favorite professors. He’s not just a brilliant researcher and practitioner, but also a fabulous teacher, to boot.”

Mehra’s classmate Nathan Kastner ’19 appreciated the course’s comprehensive overview. “I left the course with an excellent understanding of derivative pricing and a greater appreciation of the options strategies available to investors,” says Kastner, a strategy insights and planning consultant at ZS Associates. “I look forward to implementing these lessons in my own personal investing in future years.”

Paraj Tyle ’19, an executive assistant to the CEO at Allianz Real Estate, says the course’s topical, up-to-the-minute view is invaluable. “The course paints a picture of what the financial world looks like, and is instrumental in making sense of the massive interlinked webs that today’s financial markets have become,” Tyle says.

“It helps make sense of option prices, and it opens up more data points to consider when making strategic calls. Learning about all the different hedging instruments is also very useful, particularly because a lot of what I do is across international markets, and mitigating risks is part-and-parcel of delivering returns.”