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://zahidrehman.yolasite.com
(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 and readings
1.Introduction: motivation
for risk management, Why risk management, creating value with risk management,
Find risk and return for an asset and portfolio
2.Financial engineering: derivatives (forwards, futures, swaps,basic
and exotic options) and standard hedging techniques
3.Measuring volatility: EWMA and GARCH models, implied and
realized volatility.
4.Market risk: VaR (value at risk) measurement (RiskMetrics,
historical, and Monte Carlo approaches), back-testing, stress testing, alternative
risk measures
5.Liquidity risk
6.Credit risk: Merton model, modern structural and reduced-form models,
credit derivatives