Course Outline - Financial Risk Management
COURSE OUTLINE: FINANCIAL RISK MANAGEMENT
Course Summary
This course will focus on variety of risks faced by financial managers and the tools available for managing these risks. Particularly, we shall focus on credit risk, interest rate and liquidity risks, market risk, foreign exchange risk, and country risk. We shall learn about the tools and techniques available for managing these risks such as future contracts, option contracts, swaps, value-at-risk (VaR) and other standard risk-hedging techniques, and methods of measuring volatility. Students attending this course are expected to have studied basic courses of investment and portfolio management and have good understanding of asset pricing models.
Course Books
There is no single book that will cover all the topics included in this course. Selected chapters from the following books will be covered in the course. Also, additional reading materials will be made available at the website of the course: http://sites.google.com/site/imspeshawar (remember do not include the prefix www to the website address
Hull, John C., 2007, Risk Management and Financial Institutions (RMFI), Prentice-Hall.
Hull, John C., 2006, Options, Futures, and Other Derivatives [OFOD], Prentice-Hall (sixth edition).
Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffery F., & Roberts, Gordon S., Corporate Finance, Any Edition, McGraw Hill Ryerson, 1999. [Referred to below as “RWJR”]
Risk Management and Derivative by Rene Stulz, second edition
Course Outline
1. Introduction to Financial Risk Management
Motivation for risk management
Why risk management?
Creating value with risk management
Measuring risk for a single asset and for a portfolio of assets
2. Financial Engineering & Hedging
Basics of derivatives
Forwards, pricing of forward contracts under assumptions of dividends, carrying costs, etc
Futures, settlement mechanism, clearing house concept
Hedging with futures and forwards
Basic, and exotic options
Basics of option valuations, valuation options using Black-Scholes Model
Duration hedging
3. Measuring volatility and Correlations
Conditional and unconditional volatility
Weighted and unweighted conditional volatility
EWMA and CARCH (1,1) approaches to volatility
Estimating covariance
4. Market Risk
Value at Risk (VaR) measurement
Historical and Monte Carlo Simulation approaches
Back-testing
Stress-testing
Capital charge for market risk under Basel rules
5. Credit Risk
Credit analysis models (expert system, credit scoring and rating models, artificial neural networks
Capital charge for credit risk under Basel rules
Calculating default probabilities with actuarial and market prices based methods
Measuring loss given defaults with actuarial methods
Credit Derivatives