Centre for Financial & Management Studies (CeFiMS) - University of London

Individual Professional Courses – IPC    

Risk Management: Principles and Applications [FFL105]

Introduction

This course examines the techniques and the foundation of risk management in corporations. It covers the use of derivatives, portfolio allocation, the value of risk, and the management of credit risk and operations risk. The course includes cases and applications.

Aims & Objectives

When you have completed this course, you will be able to do the following:

• Outline the most important strategies of risk management
• Explain how stocks and bonds can contribute to the risk and return of a financial portfolio
• Discuss the key principles of diversification of financial investment
• Correctly measure the risk of financial portfolios
• Explain the risk profile involved in financial derivatives, such as futures and options
• Discuss the importance of Value at Risk and scenario analysis
• Define and use the principles of credit risk analysis

Resources

Students receive a looseleaf binder containing eight ‘course units’; these texts are carefully structured to provide the main teaching and are equivalent to traditional course lectures, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the further assigned readings. Two assignments (to be marked by your CeFiMS tutors), and a specimen examination paper are also included within the student pack, along with the following:

Textbooks:

Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann, Modern Portfolio Theory and Investment Analysis, Sixth edition, 2002, John Wiley & Sons, ISBN0471238456.

John C. Hull, Basic Fundamentals of Futures and Options Markets, Fifth edition, 2005, Prentice Hall, ISBN0131273949.

Michel Crouhy, Dan Galai and Robert Mark, Risk Management, First Published 2000, McGraw Hill Education, ISBN0071357319.

Readings:

A compilation of further readings: recently published articles or seminal writings which augment and illustrate the main text.

Course Timetable:

This shows the linkage between the various components of the course and indicates the schedule for reading the texts, submitting assignments, etc.

Course Content

• Unit 1 Introduction to Risk Management

• 1.1 Introduction to Portfolio Analysis
• 1.2 Risks Faced by Financial and Non-financial Institutions
• 1.3 Financial Securities and Financial Markets
• 1.4 The Mean-Variance Approach
• 1.5 The Opportunity Set under Risk - Efficient Portfolios
• 1.6 Short Sales and Riskless Lending and Borrowing
• 1.7 How to Compute the Efficient Set
• Unit 2 Portfolio Analysis
• 2.1 Introduction
• 2.2 The Single-Index Model
• 2.3 Methods for Estimating Betas
• 2.4 Fundamental Betas
• 2.5 Multi-Index Models
• 2.6 Fundamental Multi-Index Models
• 2.7 Conclusions
• Unit 3 Management of Bond Portfolios
• 3.1 Introduction
• 3.2 Returns on Bonds
• 3.3 The Term Structure of Interest Rates
• 3.4 Default Risk and Callable Bonds
• 3.5 Duration
• 3.6 Convexity
• 3.7 Passive Bond Portfolio Management - Matching, Immunisation, Indexation
• 3.8 Active Bond Portfolio Management - Index Models
• 3.9 Active Bond Portfolio Management – Swaps
• Unit 4 Futures Markets
• 4.1 Introduction
• 4.2 Description of Financial Futures
• 4.3 Pricing of Financial Futures
• 4.4 Futures Strategies
• 4.5 Examples of Using Futures
• 4.6 Interest Rate Futures
• 4.7 Currency Futures
• 4.8 Conclusions
• Unit 5 Options Markets
• 5.1 Introduction
• 5.2 Features of Options Contracts
• 5.3 Options on Stocks and Futures
• 5.4 Risk Exposure and Profit Potential of Options and Futures
• 5.5 The Put-Call Parity Formula
• 5.6 Option Pricing - The Black-Scholes Formula
• 5.7 Pricing of Options on Futures
• 5.8 Price Volatility
• 5.9 Conclusions
• Unit 6 Risk Management with Options
• 6.1 Introduction
• 6.2 Speculation with Options - Combinations of Calls and Puts
• 6.3 Hedging with Options - against a Price Increase
• 6.4 Hedging with Options - against a Price Decline
• 6.5 Sensitivities of Option Prices
• 6.6 Delta Hedging
• 6.7 Conclusions
• Unit 7 Value at Risk
• 7.1 Introduction
• 7.2 Definition of Value at Risk
• 7.3. Calculation of Value at Risk - the Variance-Covariance Approach
• 7.4 Delta-Normal VaR
• 7.5 Historical Simulations Approach
• 7.6 Incremental-VaR and DeltaVaR
• 7.7 Stress Testing and Scenario Analysis
• 7.8 Limitations of VaR - EVaR
• 7.9 Conclusions
• Unit 8 Credit Risk
• 8.1 Introduction
• 8.2 Credit Rating Systems
• 8.3 Internal Risk Rating
• 8.4 CreditMetrics
• 8.5 Analysis of Credit Migration
• 8.6 Valuation of Bonds
• 8.7 Forward Distribution of Changes in the Value of Bonds
• 8.8 Credit VaR for a Bond or Loan Portfolio
• 8.9 Credit VaR and Calculation of Capital Charge
• 8.10 Conclusions

Tuition & Assessment

One two-hour examination and one assessed piece of written coursework in each module. Each course module will count for 10% of the total mark. Of this 10%, the examination will count for 70% and the coursework for 30%.