This module aims to train students in evaluating, measuring and managing a range of financial risks to which companies are exposed. Particular emphasis is placed on the measurement and management of market risks, cash flow risks, interest rate risks and credit risks. The module also includes a brief discussion of recent issues on risk management (subprime crisis, the role of risk management failures etc.)

(LO1) A critical understanding of the risk management function and the nature of the relationship between risk and firm value.

(LO2) Advanced knowledge of several risk evaluation and measurement techniques (Value at Risk, Volatility, Correlations/Copulas).

(LO3) Demonstrated ability to analyze the factors that lead companies to high levels of interest rate risk, market risk, credit risk and liquidity risk.

(LO4) Good understanding of the current academic literature on risk management with main emphasis on studies analyzing risk management failures (e.g. credit crisis, LTCM failure etc.)

(LO5) Valuable applied research skills in risk management and measurement [e.g. how to use specific econometric and statistical software (e.g. Eviews) in the analysis of relevant specific problems in risk management (e.g. calculating and evaluating “Value at Risk” measures)]

(S1) Problem solving. Students will be required to develop problem solving skills in lectures and seminars.

(S2) Numeracy. Numeracy will be developed through the application of techniques taught in lectures to various real and artificial data sets.

(S3) Critical awareness. Critical perspectives will be gained from required reading.

(S4) Analytical thinking. Students will work through problem sets both individually and in seminars.

(S5) Communication skills. Communication skills will be developed through the careful interpretation and guided discussion of results in practical sessions.

(S6) IT skills. IT skills will be developed through the application of techniques taught in lectures to various real and artificial data sets.

Mixed, hybrid delivery, with social distancing on campus

Face-to-face seminars x 12 hours
Asynchronous learning x 24 hours
Group study x 6 hours
Self-Directed Learning x 108 hours

TOPIC 1: Risk Management and Value Creation

What does value creation mean?

Risk management at a centre stage

Mapping the risks corporations face

Why manage risk?

Do firms properly manage risk?

Risk and Return for companies vs. Risk and Return for Investors

Risk Management and Value Creation

Does risk management create value: Empirical evidence

TOPIC 2: Market Risk: Value-at-Risk and Alternative Risk Measures

The History of Market Risk Management

Value-at Risk Defined

Computation of VaR

VaR-The Role of Time Horizon

The Impact of Autocorrelation

Back-Testing

Stress Testing Risk

Issues with VaR (Coherence)

Alternative to VaR

Case Studies

Topic 3 : Value-at-Risk: Volatility Updating, Extreme Events and Multiple Assets

VaR and Normality

VaR and Volatlity

The Exponentially Weighted Moving Average (EWMA) model

(G)ARCH Motivation

(G)ARCH Estim ation

Application: GARCH using Microsoft Excel Application: GARCH using Eviews Application: GARCH using Stata

Practical Example: Computation of VaR after Relaxing the Constant-Volatility Assumption

VaR-Extreme Value Theory

Generalized Pareto distribution and MLE

Value at Risk: Extensions

Other Types of VaR: Incremental VaR; Marginal VaR; Relative VaR

TOPIC 4 : Interest Rate Risk

Interest Rate Risk Defined

Do Investors Face a High Exposure to Interest Rate Risk Today?

The Management of Net Interest Income

Libor and Swap Rates

Duration

Duration and Interest Rate Risk Management

Convexity

Generalization

Non-Parallel yield curve Shifts

Interest Rate Deltas in Practice

Case Study: The Interest Rate Risk at Freddie Mac

TOPIC 5 : Credit Risk: Estimating Default Probabilities

Credit Risk Models

Bankruptcies and the Altman´s Z score

Estimating Default Probabil ities Using

Practice: The KMV model using Microsoft Excel

TOPIC 6: Crises and Risk Management Failures

Moral Hazard in Mortgage Securitization: The Origins of the Crisis

Systemic Risk in the Crisis

Towards Regulatory Reform

Recent Risk Management Failures-The Case of Lehman Brothers

Lehman Brothers-Harvard Business School-Case 810106

Linking Monetary Cycles, Financial Cycles, and the Business Cycle