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 including Value at Risk, volatility, correlations/copulas;

(LO3) Demonstrated ability to analyse 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 analysing risk management failures, eg credit crisis, LTCM failure etc.;

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

(S1) Problem solving

(S2) Numeracy

(S3) Critical awareness

(S4) Analytical thinking

(S5) Communication skills

(S6) IT skills

Teaching Method 1 - Lecture
Description:
Attendance Recorded: Not yet decided

Teaching Method 2 - Seminar
Description:
Attendance Recorded: Not yet decided

Topic 1: Risk Management and Value Creation:

What does value creation mean?;
Risk management at 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 (VaR) 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 volatility;
The Exponentially Weighted Moving Average (EWMA) model;
(G)ARCH motivation;
(G )ARCH estimation;
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;
Generalised 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;
Generalisation;
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 Z-score;
Estimatin g default probabilities;
Practice: the KMV model using Microsoft Excel.

Topic 6: Crises and risk management failures:

Moral hazard in mortgage securitisation: 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.