BU.230.730.XX – Managing Financial Risk – Instructor Name – Page 1 of 6
/Managing Financial Risk
2 CreditsBU.230.730.XX
[NOTE:Each section must have a separate syllabus.]
[DayTime/ex: Monday, 6pm-9pm]
[StartEnd Dates / ex: 3/24/15-5/12/15]
[Semester / ex: Fall 2016]
[Location / ex: Washington, DC]
Instructor
[Full Name]
Contact Information
[Email Address]
[Phone Number,(###) ###-#### (Optional)]
Office Hours
[Please specify the day and time of the 2 hours that will be dedicated to office hours each week. For evening classes, faculty may wish to hold their office hours by phone or email. While faculty are permitted to state “and by appointment,” office hours should not be held exclusively by appointment.]
Required TextsLearning Materials
- Christoffersen, P. F. (2012).Elements of Financial Risk Management (2nded.). Elsevier.
This is a technical book, but very well written and easily accessible. It analyzes the state of the art techniques currently employed to manage market risk. It comes with several empirical examples along with their solutions (available on the companion web-site
- Lecture notes will be posted on Blackboard (likely every Monday) before class
RecommendedText
- Hull, J. C. (2012).Risk Management and Financial Institutions (3rded.). Wiley.
This book is from one of the leading experts in risk management and derivatives. It provides a clear and detailed description of the main aspects of financial risk. It is a standard reference both for academics and practitioners.
Course Description
The course offers an introduction to financial risk management. Risk management is a complex process of identifying, measuring, and controlling risk exposure. The course will balance theory and practical application. Topics include market and credit risks, liquidity, and operational and legal risks, including volatility modeling, and derivatives as tools for controlling risk. Using modern econometric models, such as ARCH and GARCH, along with widely used quantitative methods (Monte Carlo simulation and Filtered Historical simulation), the course will describe how to measure and control risk exposure towards various types of risks, especially market and credit risk.
Prerequisite(s)
(BU.220.620 OR BU.912.611) AND BU.232.710
Statement about Finance and Social Responsibility
The effectiveness and perceived integrity of finance have been tested in recent years. Along with preventable excesses and regrettable distortions, financial innovation has, however, always been an effective means for society to achieve its goals, from insurance to consumption to saving. The power of financial innovation as a generator of inclusive prosperity and widespread well-being can (and should be) reclaimed. In this context, optimization of shareholder’s value, for instance, may not be the only metric along which financial success is measured and should be placed, along with other traditional finance metrics, in the broader context of its contribution to society. To this extent, Carey encourages technical, non-ideological, exchanges of ideas leading to a better understanding of the broader role of finance as a force for shared prosperity. The first class provides an initial opportunity for technical discussions of these issues as they relate to the topics covered in Managing Financial Risk.
Learning Objectives
By the end of this course, students will be able to:
- Identify different types of risks and their characteristics.
- Learn basic statistical properties of stock returns.
- Forecast volatility using both daily and intra-daily prices.
- Compute Value at Risk measures.
- Compute Expected Shortfall measures.
- Assess the quality and robustness of different risk management techniques.
- Hedge portfolio exposure using greeks.
- Understand, identify, and hedge credit risk.
To view the complete list of Carey Business School’s general learning goals and objectives, visit the Carey website.
Attendance
Participants are expected to attend all scheduled class sessions. Failure to attend class will result in an inability to achieve the objectives of the course. Full attendance and active participation are required for you to succeed in this course.
Assignments
Assignment / Learning Objectives / WeightHomework 1 (Excel Problem Set) / 1–3 / 20%
Homework 2 (Excel Problem Set) / 1–6 / 20%
Final Exam (Closed Book, paper-based) / 1–8 / 60%
Total / 100%
Homework (40%): There will be two homework assignments, each worth 20%. The assignments have a very important pedagogical role. They are designed to check your understanding of the material covered in class. You can work on these in groups (maximum 3 people) but you do not have to do so, if you so choose. The Homework will be solved using Excel and it will be graded in hundreds. The rubrics of the homework will be posted on Blackboard along with the homework itself.
Final Exam (60%): The final exam will be about 3 hours long. It will be closed-book and paper-based.
Grading
Effective Fall 2017: The grade of A is reserved for those who demonstrate extraordinarily excellent performance as determined by the instructor. The grade of A- is awarded only for excellent performance. The grades of B+, B, and B- are awarded for good performance. The grades of C+, C, and C- are awarded for adequate but substandard performance.The grades of D+, D, and D- are not awarded at the graduate level (undergraduate only). The grade of F indicates the student’s failure to satisfactorily complete the course work.
Please note that for Core and Foundation courses, a maximum of 25% of students may be awarded an A or A-; the grade point average of the class should not exceed 3.3. For Elective courses, a maximum of 35% of students may be awarded an A or A-; the grade point average of the class should not exceed 3.4. (For classes with 15 students or fewer, the class GPA cap is waived.)
Tentative Course CalendarThe instructors reserve the right to alter course content and/or adjust the pace to accommodate class progress. Students are responsible for keeping up with all adjustments to the course calendar.
Chr = Christoffersen P. F.
ch = chapter
Week / Topic / Reading / Goal / Homework1 / 1.1 Introduction to thecourse
1.2 Risks taxonomy
1.3 Useful statisticalconcepts / 1.1 Chr, ch 1
1.2 Chr, ch 1
1.3 Chr, ch 1 / 1.1 To motivate the usefulness of risk management.
1.2/1.3 To understand different types of risks and how they affect different institutions.
1.4 To introduce/review useful statistical tools that will be used throughout the course.
2 / Stylized Facts:
2.1 Linear model
2.2 AR models
2.3 Random walk / 2.1 Chr, ch 3
2.2 Chr, ch 3
2.3 Chr, ch 3 / 2.1 To introduce the linear model and its role for risk management.
2.2 To present AR model to describe financial time-series.
2.2 To present the Random Walk process and its role in modern finance.
3 / 3.1 Volatility
3.2 GARCH models
3.3 Realized volatility / 3.1 Chr, ch 4
3.2 Chr, ch 4
3.3 Chr, ch 5 / 3.1/3.2 1 To model volatility using daily price observations.
3.3 To measure and model volatility using intra-day price observations. / Homework 1 posted on Blackboard at the end of the class.
Due for the following week.
4 / 4.1 Value at risk
4.2 Expected shortfall
4.3 Deviation from normality / 4.1 Chr, ch 1, 2
4.2 Chr, ch 1, 2
4.3 Chr, ch 6 / 4.1 To measure value at risk
4.2 To measure expected shortfall.
4.3 To show some limitation behind normality assumption.
5 / 5.1 Multi-horizon and multivariate risk models
5.2 Backtesting
5.3 Stress testing / 5.1 Chr, ch 7, 8
5.2 Chr, ch 13
5.3 Chr, ch 13 / 5.1 To extend the univariate one-day ahead risk measures.
5.2 To assess the effectiveness of a risk management strategy.
5.3 To assess the robustness of a risk management strategy. / Homework 2 posted on Blackboard at the end of the class.
Due for the following week.
6 / 6.1 Options and Greeks
6.2 VIX index / 6.1 Chr, ch 10, 11
6.2 Lecture Notes / 6.1 To use greeks to reduce the portfolio risk exposure.
6.2 Delta Hedging
6.2 To introduce the VIX index: its construction and its role for risk management.
7 / 7 Credit risk / 7 Chr, ch 12 / 7.1 To describe the nature of credit risk and how to control it.
7.2 The Merton Model
8 / Final Exam / Paper-based test
BU.230.730.XX – Managing Financial Risk – Instructor Name – Page 1 of 6
Carey Business School
Policies and General Information
Blackboard Site
A Blackboard course site is set up for this course. Each student is expected to check the site throughout the semester as Blackboard will be the primary venue for outside classroom communications between the instructors and the students. Students can access the course site at Support for Blackboard is available at 1-866-669-6138.
Course Evaluation
As a research and learning community, the Carey Business School is committed to continuous improvement. The faculty strongly encourages students to provide complete and honest feedback for this course. Please take this activity seriously; we depend on your feedback to help us improve. Information on how to complete the evaluation will be provided toward the end of the course.
Disability Support Services
All students with disabilities who require accommodations for this course should contact Disability Support Services at their earliest convenience to discuss their specific needs. If you have a documented disability, you must be registered with Disability Support Services ( or 410-234-9243) to receive accommodations. For more information, please visit the Disability Support Services webpage.
Academic Ethics Policy
Carey expects graduates to be innovative business leaders and exemplary global citizens. The Carey community believes that honesty, integrity, and community responsibility are qualities inherent in an exemplary citizen. The objective of the Academic Ethics Policy (AEP) is to create an environment of trust and respect among all members of the Carey academic community and hold Carey students accountable to the highest standards of academic integrity and excellence.
It is the responsibility of every Carey student, faculty member, and staff member to familiarize themselves with the AEP and its procedures. Failure to become acquainted with this information will not excuse any student, faculty, or staff from the responsibility to abide by the AEP. Please contact the Student Services office if you have any questions. For the full policy, please visit the Academic Ethics Policy webpage.
Students are not allowed to use any electronic devices during in-class tests. Calculators will be provided if the instructor requires them for test taking. Students must seek permission from the instructor to leave the classroom during an in-class test. Test scripts must not be removed from the classroom during the test.
Student Conduct Code
The fundamental purpose of the Johns Hopkins University’s regulation of student conduct is to promote and to protect the health, safety, welfare, property, and rights of all members of the University community as well as to promote the orderly operation of the University and to safeguard its property and facilities. As members of the University community, students accept certain responsibilities which support the educational mission and create an environment in which all students are afforded the same opportunity to succeed academically. Please contact the Student Services office if you have any questions. For the full policy, please visit the Student Conduct Code webpage.
Student Success Center
The Student Success Center offers free online and in-person one-on-one and group coaching in writing, presenting, and quantitative courses. The center also offers a variety of workshops, exam study sessions, and instructor-led primer seminars to help prepare students for challenging course content, including statistics and accounting. For more information or to book an appointment, please visit the Student Success Center website.
Other Important Academic Policies and Services
Students are strongly encouraged to consult the Carey Business School’s Student Handbook and Academic Catalog and Student Resources for information regarding the following items:
- Statement of Diversity and Inclusion
- Inclement Weather Policy
Copyright Statement
Unless explicitly allowed by the instructor, course materials, class discussions, and examinations are created for and expected to be used by class participants only.The recording and rebroadcasting of such material, by any means, is forbidden. Violations are subject to sanctions under the Honor Code.