Management of Financial Risk

Learning Outcomes

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

• how credit, market, liquidity, interest rate and operational risks are managed.
• the role of volatilities and correlations in the management of financial risk;
• how market, interest rate and credit risk are measured;

Transferable and Generic Skills

Having successfully completed this module you will be able to:

• recognise that in many situations there are a range of alternatives which should be evaluated;
• self-manage the development of learning and study skills, both individually and as part of a collaborative learning group;
• apply the research skills to synthesise, analyse, interpret and critically evaluate information from a range of sources.

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

• know how operational and model risks are quantified and managed.
• apply insights from the latest research on management of financial risk to specific situations;
• understand the latest trends in managing financial risk;
• understand and apply appropriate theoretical concepts, models, tools and techniques of risk management;
• appreciate the limitations of the different methodologies used in practice.

In this module, the aim is to integrate risk management as part of financial theory and practice. The three main risk concepts in the investment and corporate risk management field are: market risk (times series), credit risk (financial ratings) and operational risk (evaluation and reporting techniques). We introduce the mathematical tools required to quantify, describe and analyse these risks quantitatively (including graphic representation, bootstrapping, calculation of transition matrices, ARCH/GARCH models, VaR, and Monte-Carlo simulation). Finally, we introduce some programming tools in Excel and MatLab to demonstrate how to compute exposure to these risks.

Topics:

• Risk and the management of the firm.
• Market mechanisms and efficiency.
• Interest-rate risk.
• Currency risk.
• Equity and commodity price risk.
• The behaviour of asset prices.
• Risk assessment.
• Controlling risk.
• Quantifying financial risks.
• Financial methods for measuring risk.
• Qualitative approaches to risk assessment.

Teaching and learning methods

Teaching methods include:

Weekly lectures will provide an overview of the main issues arising in this module, and will be supplemented by weekly empirical and theoretical exercises. Exercises will support your learning by providing opportunities for you to attempt, and gain feedback on, numerical and problem-solving exercises. You will also have the opportunity for both directed and non-directed independent reading.

Learning activities include:

The module will be taught by a mixture of methods ranging from guided background reading, lectures, group work and the exploration of mini case-studies and datasets. The lecturer will draw upon market developments current at the time of the course.

The lecturer will introduce the concepts, and you will have the opportunity to practice and apply the methods discussed. A step-by-step analysis of different risk measurements will enable deeper understanding of the subject material.

Resources & Reading list

Textbooks

Hull (2009). Managing Financial Risk. Valuation.

Zvi Bodie, Alex Kane and Alan J. Marcus (2014). Investments. McGraw-Hill.

Formative

This is how we’ll give you feedback as you are learning. It is not a formal test or exam.

Commentary

• Assessment Type: Formative
• Feedback: One to one feedback will be provided if required.
• Final Assessment: No
• Group Work: No

Summative

This is how we’ll formally assess what you have learned in this module.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

Repeat

An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.

Repeat Information

Repeat type: Internal & External