Course Description


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://opendoors.pk/courses/financial-risk-management.

1.Hull, John C., 2007, Risk Management and Financial Institutions (RMFI), Prentice-Hall.

2. Hull, John C., 2006, Options, Futures, and Other Derivatives [OFOD], Prentice-Hall (sixth edition).

3.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


Too often, finance courses stop short of making a connection between textbook finance and the problems of real-world business. This course bridges this gap between theory and practice by providing a nuts-and-bolts guide to solving common financial models with spreadsheets. This course takes the students step by step through financial models and various data management issues, showing how they can be solved.

 Lectures Weeks Book Chapter
Week 1 • Motivation for risk management
• Why risk management?
• Risk Management process
Book Chapter 2: Risk Management and Value Creation in Financial Institutions, by Gerhard Schroeck
Week 2 • Creating value with risk management
• Measuring risk for a single asset and for a portfolio of assets
Chapter 1 and 2: Risk Management and Derivatives by Rene Stulz
Week 3 • 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
Chapter 1 and 5: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 4 • Basics of option valuations, valuation options using Black-Scholes Model
• Duration hedging
Chapter 1 and 5: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 5 • Conditional and unconditional volatility Chapter 19: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 6 • Weighted and unweighted conditional volatility
• EWMA and CARCH (1,1) approaches to volatility
Chapter 19: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 7 • Value at Risk (VaR) measurement Chapter 21: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 8 • Historical and Monte Carlo Simulation approaches to VaR Chapter 21: Options, Futures and Other Derivatives, by Jhon C. Hull
Mid-Term Exam
Week 9 • Capital charge for market risk under Basel rules Chapter 21: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 10 • Credit analysis models (expert system, credit scoring and rating models, artificial neural networks Chapter 23: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 11 • Capital charge for credit risk under Basel rules Chapter 23: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 12 • Calculating default probabilities with actuarial and market prices based methods
• Measuring loss given defaults with actuarial methods
Chapter 23: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 13 • Credit Derivatives Chapter 24: Options, Futures and Other Derivatives, by Jhon C. Hull
Week 14 • Introduction to operational risk
• How to measure operational risk
• Principles of internal control
Book Chapter 23: Risk Management and Financial Institutions, 4th Edition, by John C. Hull
Week 15 • Capital charge for operational risk Book Chapter 23: Risk Management and Financial Institutions, 4th Edition, by John C. Hull
Week 16 • Revisions Final Exam

Lecture Notes and Files

  Week No.   Download Link of the Lecture
Lecture 1: INTRODUCTION TO FINANCIAL RISK MANAGEMENT
  • Book Chapter
Download
  • Risk and Return, Risk Irrelevance Proposition, Chapter 2 by Rene Stulz
Download
  • Why FRM, risk management dimensions, ways in which risk-management can be conducted
Download
  • Class Lecture Slides
Download
  • An example of Tax shield benefit of debt finance
Download
LECTURE 2: INTRODUCTION TO DERIVATIVES
  • Class Lecture Slides
Download
  • Examples on how to use these tools
Download
  • Book on Derivative by John C Hull
Download
  • Exercise on Derivatives
Download
LECTURE 3: HEDGING RISK WITH DERIVATIVE PRODUCTS
  • Class Lecture Slides
Download
  • Example of Hedge ratio, profit and loss on long and short poistions
Download
LECTURE 4: HEDGING WITH FUTURES AND OPTIONS PART II
  • Finding option premium with Black Scholes + Metallgesselschaft Case
Download
  • Excel Worksheet to find value of Call Option with Black Scholes Option Formula
Download
LECTURE 5: DURATION ANALYSIS
  • Interest rate risk, duration analysis, impact of duration on values of financial assets and liabilities.
Download
  • An excellent tutorial on bonds and duration
DownloadDownload
  • An excellent tutorial on bonds and duration
Download
  • Book chapter on duration analysis
Download
  • How to hedge bond portfolio through immunization, by Gushee
Download
  • An exercise on duration hedging [Excel Spreadsheet to calculate Macaulay duration, $duration, and modified duration. xlsx ]
Download
  • Excel Spreadsheet to calculate Macaulay duration, $duration, and modified duration. xlsx
Download
LECTURE 7: VOLATILITY
  • Lecture Slides Definition of volatility, types of volatility, weighted and unweighted measures of volatility, GARCH(1,1) and EWMA methods
  • Exercise on how find volatility with software like STATA
  • Lecture Slides: Portfolio Theory with Matrix Algebra + Handouts
  • 4.Variance-Covariance Calculator + Practice Sheet
  • 5.Video on how to find find portfolio risk with matrix [ download ]
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LECTURE 8-11: MARKET RISK
  •  Lecture Slides Download:
  •  Var, Stress Testing, Back Testing
  • Historical Simulation Exercise
  • Portfolio VaR and Monte Carlo Simulation for Value at Risk Slides
  • Calculation of Delt Normal VaR )Parametric in Excel
  • Monte Carlo Simulation for VaR in Excel
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LECTURE 12: CREDIT RISK
  • Introduction to Credit Risk, Credit Risk Models
  • Expert Systems, Credit Scoring Models
  • Neural Networks, Basel II and Credit Risk
Download
LECTURE 13: CREDIT RISK II
  • Credit Risk Part II: Probability of Default from actuarial data and market price, credit ratings and recovery rates
  • Credit Derivative: Credit Default Swaps, Total Return Swaps, Credit Default Option
Download
LECTURE 14: OPERATIONAL RISK
  • Operational Risk, definition and capital charge under Basel II
  • SBP collections of helpful materials on operational risk and other risk Access Here
Download

Download

LECTURE 15: OPERATIONAL RISK
  • Research paper by Jhon C Hull on The Credit Crunch of 2007: What Went Wrong? Why?
  • What Lessons Can Be Learned? [One more paper
  • Operational Risk Management Slide
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Extra Class files


Class group photos MS Management Session 2020 [View Photos]

Assignments

Assignment Marks = 3
Submission Deadline =
Submission Link
Tasks to be completed in the assignment

(a) Convert the above dataset to Excel format using the pipe “|” as a delimiter

(b) Extract all lines that have the word dividend, dividends, or div and make a separate sheet from it. Give that sheet a name “Dividends”

(c) In that dividend sheet, extract the dividend percentages to a new column using either right, left, mid, search, len functions or “text to column” option from the Data menu or combination of these techniques.

(d) In the dividend percentages, some of the records have capital O instead of zero 0, find and replace all such instances of O with 0.

(e) Repeat the above steps for finding profit/loss amounts from the main dataset

(d) Repeat the steps (a) to (d) for finding earning per share (eps) figures from the main dataset.

NOTE: Assignment copied from one another will get zero marks.

Please add explanations for the given steps using the Insert > text box

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