Spring 2019
Professor Philippe Jorion
THE PAUL MERAGE SCHOOL OF BUSINESS
UNIVERSITY OF CALIFORNIA, IRVINE
Course Description:
This course examines modern techniques for managing financial risks. Understanding financial risk is a core knowledge of financial managers. This goes one step beyond understanding the mechanics of financial instruments, which is the assessment of their potential loss. Financial risks are generally classified into market risks, due to movement in financial prices or volatilities, credit risks, due to fact that counterparties are unwilling or unable to fulfill their contractual obligations, liquidity risks, when transactions cannot be conducted at prevailing market prices, perhaps due to cash flow constraints, and operational risks, which arise from human or technical problems.
The course will cover measurement techniques for different types of financial risks (equity, fixed income, currency, commodity) and instruments. It will cover tools such as duration, portfolio beta, factor sensitivities, portfolio distribution analysis, and value at risk (VAR). It will also discuss how risk measurement tools can be used for active management of the risk/return profile of financial institutions.
Course Objective:
To provide participants with an in-depth knowledge of the most recent risk identification, measurement and management techniques. This topic is essential for professionals involved in risk management, trading, hedge funds, treasury management, financial corporate strategy, as well as regulatory supervision of financial institutions.
Risk management is also an important topic for the Chartered Financial Analyst certification organized by the CFA Institute. This course can also be viewed as a preparation for the Financial Risk Manager certification organized by GARP.
Course Prerequisites:
Risk management should be viewed as the last step in a sequence of finance electives. The topic is integrative in nature, covering all sources of risk (equity, fixed-income, currency, and commodity), as well as derivative instruments, with a heavy dose of statistics. The MFIN 249 Derivatives class is required. Also, the Fixed-Income class is highly recommended. No auditors will be allowed in the course.
Course Materials:
In addition to class notes, the required text (for readings) is:
* Value-at-Risk: The New Benchmark for Managing Financial Risk, by Philippe Jorion, 2006, McGraw-Hill. Book exercises: Answer Key
We will also use parts of:
* Financial Risk Manager Handbook, by Philippe Jorion, 2010 (sixth edition), Wiley.
Classroom Policies:
Academic Honesty- By enrolling in this course, you agree to be bound by UCI’s policy on academic honesty academic honesty.
Attendance – Your attendance for each class session is expected, as is your active participation. Repeated absences indicate disinterest in the course and will reflect on your grade. All assignments need to be turned in on the due date, without exceptions.
Copyright Notice – The materials used in this class, including, but not limited to, teaching videos, cases, quizzes, and homework assignments are copyright protected works. Any unauthorized copying of the class materials is a violation of federal law and may result in disciplinary actions being taken against the student.
Sharing of Class Materials – Additionally, the sharing of class materials without the specific, express approval of the instructor may be a violation of the University of California Academic Integrity Policy and an act of academic dishonesty, which could result in further disciplinary action. This includes, among other things, uploading class materials to websites for the purpose of sharing those materials with other current or future students.
Value at Risk Course: Schedule for Spring 2019
Location and time: SB1 – 2100, 7:00pm-9:50pm. Courses are held on Mondays.
(1) Monday April 1 – The Need for Risk Management, Measuring Risk
Readings: Jorion, Ch 1, 2, 3, 4, 5
Notes: Introduction, Quantitative Tools (review), Framework for Risk Management
Readings: Deutsche Bank’s Risk Report
[Optional Readings (General Risk Management):] NYT (Jan 2009): Risk Mismanagement; Economist (Feb 2010): Financial Risk–Why some banks did much better than others
[Optional Readings (News):] WSJ (Feb 2018): Ten Years After Bear Stearns; FT (Mar 2019): Why Further Financial Crises are Inevitable
Reference: FRM_Study_Guide 2019
Recruiting web sites: Risk Talent, GARP Career Center
Highly recommended resource for risk professionals: Risk Magazine
(2) Monday April 8 – Hedge Funds
Readings: Jorion (2012): CAIA Risk Management for Alternatives
Notes: Hedge Fund Risk Management
[Optional Readings on Hedge Funds:] Best Practices for Hedge Fund Investors (2008); Jorion (2008): “Risk Mgt for Event-Driven Funds”
[Optional Readings (light):] Nassim Taleb’s Amazon page; Jorion (2001): Book Review; Economist (2018): Book Review; New Yorker (2002): Blowing Up
Thursday April 11 – Review Session: 5:30-6:30PM (SB2 – 116)
(3) Monday April 15 – Measuring VAR, Portfolio Risk
Readings: Jorion, Ch 5, 7
Notes: Tools for Managing Risk
Assignment DUE: Computing VAR for a hedge fund
Thursday April 18 – Review Session: 5:30-6:30PM (MPAA-120)
(4) Monday April 22 – Fixed-Income Risk, Forecasting Risk
Readings: Jorion, Ch 5 (EVT), 8, 9
Notes: Extreme Value Theory, Time-Variation in Risk
MSCI RiskMetrics: RiskMetrics
[Optional Readings (Asset Management):] Berkelaar (2011): Risk Mgt for Institutional Funds; Western Asset Mgt (2010): Investment Risk Mgt; PIMCO (2000): Risk Measurement
Assignment DUE: Measuring the VAR of a bank
(5) Monday April 29 – Backtesting Risk Measures, Approaches to Value at Risk
Readings: Jorion, Ch 6, 10, 11
Notes: Backtesting, Building RM Systems
Thursday May 2 – Review Session: 5:30-6:30PM (MPAA-120)
(6) Monday May 6 – Orange County, VAR Mapping
Readings: Jorion, Ch 11
Notes: Building RM Systems
Assignment DUE (Web-based): Orange County Case
Thursday May 9 – Review Session: 5:30-6:30PM (MPAA-120)
(7) Monday May 13 – Stress Testing, Liquidity Risk, Basel Capital Requirements
Readings: Jorion, Ch 13, 14, 3
Notes: Stress Tests, Liquidity Risk, Basel Market Risk Charge, Basel Capital Requirements
Assignment DUE: Mapping Financial Instruments
Thursday May 16 – Review Session: 5:30-6:30PM (MPAA-120)
(8) Monday May 20 – Credit Risk: Introduction, Regulation
Readings: Jorion, Ch 18
Notes: Credit-Basel, Credit Risk
Assignment DUE: Building a Risk Management System
(9) Monday May 27 – No class (Memorial Day)
(10) Monday June 3 – Credit Risk VAR Models, Exam Review
Readings: Jorion, Ch 18
Notes: Credit Risk, Exam Reviews
[Optional Readings (light):] FT (2006): The Birth of Credit Derivatives
[Optional Readings (light):] McKinsey (2017): Digital Risk; RISK (2018): Quants Needed +
[General Readings:] JPM (2017): Machine Learning in Investments; JPM (2017) Implications: Big Data Jobs in Finance; Granville (2017): Data Science, and Statistics
Thursday June 6 – Review Session: 5:30-6:30PM (MPAA-120)
(11) Monday June 10 – Final
Open book, bring a calculator (no laptop, no phone)
Preparation: Sample Final , Solution
Exam Tips, Course Summary