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: https://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 | |
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LECTURE 2: INTRODUCTION TO DERIVATIVES | |
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LECTURE 3: HEDGING RISK WITH DERIVATIVE PRODUCTS | |
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LECTURE 4: HEDGING WITH FUTURES AND OPTIONS PART II | |
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LECTURE 5: DURATION ANALYSIS | |
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LECTURE 7: VOLATILITY
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LECTURE 8-11: MARKET RISK
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LECTURE 12: CREDIT RISK
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LECTURE 13: CREDIT RISK II
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LECTURE 14: OPERATIONAL RISK
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LECTURE 15: OPERATIONAL RISK
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Assignment #1 Results
Name of the Student in the Class ….. | Asignment (6Marks) | Asg1 Comments |
Abdul Baseer | 3.5 | short |
Abdul Qadir | 2 | 50% similarity index |
Abdullah | 3 | |
Aminullah | 3 | Assignment is too short, only 1844 words compared to reeqeuired length of 3000 words 2. Why BSEIndia was taken instead of a nonfinancial company as required in the assignment |
Awais Ali Khan | 3.5 | Short |
Bushra Younas | 2 | 57% similiratiy index |
Ghulam Yasin | 3 | Short |
Habib Ullah | 3.5 | Half of the required length |
Junaid Nisar | 2 | Too short to be taken serious, only 518 words. |
Muhammad Zahid Durrani | 5 | |
Naser Rehman | 3.5 | short |
Rooha Nawaz | 4 | Short |
Rubiya Riaz | 2.5 | Too short |
Salman Khan | 4 | |
Sania Abbas | 3.5 | Short |
Shah Rukh Bibi | 3 | Too short |
Shakeel Ahmed | 2 | 50% similarity index |
Shehzad Khan | 3.5 | Short and high similairty index |
Sohaib Ahmad | 2 | 1. Similarity index is 80% 2. Assignment is too short, only 1481 words compared to reeqeuired length of 3000 words |
Subhanullah | 4 | Short |
Waqar Afridi | 4 | |
Waqas Ali | 4 | Trading at PMEX casually copied and pasted |
Warda | 4 | Short |
Waseem Khan | 2.5 | Short and high similairty index |
Yaseen Abbas | 2 | Too short to be taken serious, only 749 words and written in large fonts |
Mubeen Shah * | 5 | |
Shah Saud Jan * | 4.5 | |
Abdullah | 3 | too short |
Folad | 5 | |
Habibullah | 5.5 | |
Muhammad Younus | 4.5 | |
Obaidullah | 5.5 | |
Musa Anwar | 3 | Too short. Risk management practices not discussed |
Assignments
(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
Submission Deadline =
Submission Link