Financial Risk Management

Introduction

This course provides an introduction to derivatives and risk management with a focus on applications to financial firms. The remarkable growth in the use of financial derivative instruments for risk-management combined with their increasing complexity makes the basic understanding of derivatives and their applications essential for both students and specialists in finance, as well as general business practitioners. Moreover, risk management is a key area of focus for creating sustainable firms in a changing business environments, especially as firms become more internationally focused.

The objective of this course is to provide students with an understanding of financial risk management. Specifically, we will focus on questions such as: why financial institutions (and non-financial corporations) should manage their financial risks; what risks firms, especially financial institutions, face; and what tools they use to do so (mainly derivative securities). The course will give a brief overview of the valuation and the use of derivatives for risk management, as well as insights into hedging decisions, motivations, and the different types of risks financial firms face (e.g., market, liquidity, and credit risks). In addition, the course will explore how firms measure and managing their financial risks by utilizing computer simulation tools (e.g., via R or Python). We will also examine how regulations specific to financial institutions affect their risk management practices. The course will contain both theory and examples/cases of risk management applications. Overall, students should leave the course with the ability to understand the causes of past failures and have the ability to prevent them in the future. Another primary goal of this course is to allow students an opportunity to apply their theoretical knowledge and skills gained in prior courses to various real-world applications.

The course starts with an overview of how risk management adds value. It then covers the valuation of derivatives and the markets in which they trade, including the valuation of the most common derivative securities (e.g., forwards, swaps, and options). With the knowledge of these fundamental tools, the course then delves into measuring and managing the various types of risks faced by financial institutions, including market, credit/counterparty, and liquidity risks. Emphasis is placed on building models using statistical tools and software packages (e.g. Python or R) and applying them to real world cases. Throughout the course, students will explore financial crises and failures of major financial institutions as well changing financial regulations. Students will utilize these examples as way to learn from the past to create more sustainable financial institutions in the future.

Course content

Part I: Introduction and Derivatives

1. How risk management adds value
2. Valuing of forwards, futures, options and swaps
3. Derivative markets

Part II: Risk Management

1. Managing market risks
2. Modeling and measuing risk (e.g., Volatility, Value-at-Risk, and Expected Shortfall)
3. Financial Crises and Regulations
4. Credit risk, default probabilities and value adjustments
5. Liquidity Risks
6. Corporate risk management