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Centre for Financial and Management Studies (CeFiMS)

Risk Management: Principles & Applications

Course Code:
C223|C323
Unit value:

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.

Resources

Study Guide

You will receive a looseleaf binder containing eight 'course units'. The units are carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the further assigned readings. The unit files are also available to download from the Online Study Centre.

Textbooks

Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann, (2010) Modern Portfolio Theory and Investment Analysis, Eighth Edition, John Wiley & Sons

John C. Hull, (2010) Fundamentals of Futures and Options Markets, Seventh Edition, Prentice Hall

Michel Crouhy, Dan Galai and Robert Mark, (2000) Risk Management, McGraw-Hill Education

Online Study Centre

You will have access to the OSC, which is a web-accessed learning environment. Via the OSC, you can communicate with your assigned academic tutor, administrators and other students on the course using discussion forums. The OSC also provides access to the course Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Objectives and learning outcomes of the course

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

Scope and syllabus

Course Units
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

Method of assessment

You will complete two Assignments which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 5, and the second assignment at the end of the course, on the Tuesday after Week 8. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Online Study Centre. You will also sit a three-hour examination on a specified date in October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in April each year.