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Course Syllabus

Financial Risk Management

FINC7035(2022/23)

Brief Course Description

The field of risk management has undergone a dramatic change in the last 30 years and the speed of change is accelerating.  Credit risk, market risk,  asset  and  liability management  and performance measurement have historically been thought of as separate disciplines, but recent developments in financial theory and computer science now allow these views of risk to be analyzed on a fully integrated basis. The course presents the fundamentals of corporate financial risk management and approaches the topic of risk from both academic and senior  practitioner perspectives.  The  objective  is  a  realistic  and  conceptually  motivated  overview  of risk management for major global companies. The strategic approach to risk management requires an understanding of insurance and alternative risk financing, as well as financial, insurance and commodity derivatives.

Aims

The course is designed for all students interested in risk management and its application in finance, insurance, accounting, strategic management and economics. It provides students with the knowledge and skills appropriate to the practice of risk management in preparation for a possible career that touches on the broad area of risk management.

Learning Outcomes (LOs)

On completion of this course, students will be able to:

1.      Understand the types of risks faced by an entity and be able to identify and analyse these risks.

2.      Understand how the risks faced by an entity can be quantified and the use of metrics to measure risk.

3.      Understand the approaches for managing risks and how an entity makes decisions about appropriate techniques.

4.      Understand the concept of economic capital, risk measures in capital assessment and techniques to allocate the cost of risks within business units.

Indicative Content

1. Introduction to FRM

Overview of risk management, types of financial risk, and tools of financial risk management.

2. Value at Risk (VaR) measure

Computing VaR, multivariate models, and VaR-based regulatory capital.

3. Market risk measurement and estimation

Systematic risk, systemic risk, profit/loss data, variance-covariance method, historical simulation, Monte Carlo simulation and back-testing.

4. Credit risk measurement and estimation

Default and recovery risk, market-based models, measuring credit risk, and managing credit risk.

5. Operational and liquidity risk measurement and estimation

Operational risk: identification and assessment of operational risk, measuring operational risk, monitoring and mitigating operational risk, funding operational risk, and regulatory capital requirement.

The Final Examination will be comprehensive.

Required/Essential Reading

Hull, John C., Risk Management and Financial Institutions, 5th edition, Pearson.

Recommended/Supplementary Readings

Donald R. van Deventer, Kenji Imai,  and Mark Mesler, Advanced Financial Risk Management: Tools and Techniquesfor Integrated Credit Risk and Interest Rate Risk Management, latest edition. Wiley Finance.

Segal, S., Corporate Value ofEnterprise Risk Management: The Next Step in Business Management, Wiley, 2011. Jorion, Philippe, Financial Risk Manager Handbook, Wiley, 2011.

Note: Given the subject area is developing quickly, no single textbook is fully suitable. The lecture notes draw upon different sources and so may not fully follow any of the textbooks.

Important Notes:

(1)     Students are expected to spend a total of 9 hours (i.e. 3 hours of class contact and 6 hours of personal study) per week to achieve the course learning outcomes.

(2)     Students shall be aware of the University regulations about dishonest practice in course work, tests and examinations, and the possible consequences. In particular, plagiarism, being a kind of dishonest practice, is “the presentation of another person’s work without proper acknowledgement of the source, including exact phrases, or summarized ideas, or even footnotes/citations, whether protected by copyright or not, as the student’s own work” . Students are required to strictly follow university regulations governing academic integrity and honesty.

(3)     Students are required to submit writing assignment(s) using Turnitin.