We begin by defining the various types of financial risks and stress the need for their management through the analysis of losses and defaults of financial institutions in the recent past. We next turn to the computation of Value-at-Risk measures for portfolios of equity, bond, and option positions. We discuss the estimation of the main inputs surrounding the calculation of VaR, and elaborate on models for time-varying volatility and correlations. We cover both local-valuation models based on derivatives, as well as full-valuation models such as historical simulation and Monte Carlo methods. We also discuss alternative metrics to VaR and Extreme Value Theory. Finally, we examine models for liquidity and operational risk management.
Lecture notes will be made available on the course website. The recommended textbook for the course is “Risk Management and Financial Institutions” by John Hull.
The course aims at providing the main tools for measuring and managing financial risks, with a particular focus on market risk.
Lectures will alternate between discussion of theoretical material and exercise sessions.
The course grade is based on:
80% in-class, closed-book final.
20% take-home group assignments. The group must prepare a short (max 2 pages single-sided) executive summary that summarizes the analysis and addresses the questions that are given, and an Excel file with the solution. Both files should be sent no later than midnight of the due date in order to be considered for grading. The group members are also required to attend the class where the case will be discussed, when a randomly picked group will be required to present their solution.