FINC 411 ( 20 points) FINANCIAL RISK MANAGEMENT Course Information, Semester 1, 2014

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1 FINC 411 ( 20 points) FINANCIAL RISK MANAGEMENT Course Information, Semester 1, 2014 DESCRIPTION CO-ORDINATOR Office hours: CLASSES For help: TEXTBOOK Quantification and analysis of the market risks facing corporate and financial service firms. Lynn McAlevey, Room 540 Commerce, Ph , lynn.mcalevey@otago.co.nz Mon 12-1 p.m, Tuesday 9-10 a.m, Wednesday 12-1 p.m. Monday, Wednesday am, Co537. A computer laboratory may also be used. Office hours. Recommended: Jorion P., Value at Risk, 3rd Edition, McGraw-Hill, On 3-day reserve at the Central Library. HANDOUTS 1. Return to RiskMetrics: The Evolution of a Standard, RiskMetrics, (All distributed 2. Matlab/Octave Primer. in class) 3. A package containing the below. PLAGIARISM Students must ensure that all submitted work is their own. The University's policy on plagiarism is detailed on page 6. CLASS A class representative will be appointed in the first week. More information about REPRESENTATIVE class representatives is contained on page 6. PROJECT Projects to write Schools Briefs, one per student, worth 20% of the grade, will be assigned in the third week of the course, due 10am May 16. Students present their projects to the class (25 minute presentations) in the second half of the course. ASSESSMENT Assignments 24% 8 marks due at start of class March 17, March 31, April 14) Harvard cases 6% 3 marks due day after case at 5.00 p.m.: May 7, May 14) Project 20% (See above) Examination 50% (Three hour written final, date and time to be advised) WORKLOAD Classes 50 hours (Estimated) Assignments/ cases 40 hours Project work 40 hours Reading, self-study 50 hours Exam Preparation 20 hours Total 200 hours BLACKBOARD LEARNING AIMS AND OBJECTIVES Course material is placed on Blackboard. To be able to calculate VaR using the three basic methods. To understand the role of VaR, supplementary measures of risk and limitations. To be familiar with the theory and application of financial risk management in corporates. 1

2 Course Outline The schedule is tentative; every effort will be made to keep to it. All should be studied. Others not listed, are referenced in class. Further links are on Blackboard. FIRST SEVEN WEEKS: Focus on risk measurement. WEEK 1 (February 24, 26) Market risk. Four risk measures: deltas, volatility, beta, at Risk. Matlab Risk Mismanagement, Joe Nocera The New York Times, January Handout. Jorion, Value at Risk, Chapters 1, 4. Return to RiskMetrics, Chapters 1,2. WEEK 2 (March 3, 5) Properties of financial variables. Modelling financial variables. Forecasting risks and correlations. Jorion, Value at Risk, Chapter 9. Extra Dimson E. and Mussavian M., A brief history of market efficiency, European Financial Management, March WEEK 3 (March 10, 12) VaR: Delta Normal Method. RiskMetrics methodology. Components of VaR. Jorion, Value at Risk, Chapters 5, 7, 8. WEEK 4 (March 17, 19 ) VaR: Equities, commodities, FX. Mapping. Fixed income. Forwards and Futures, Swaps, Forward Rate Agreements. Jorion, Value at Risk, Chapter 11 Return to RiskMetrics, Chapter 3, 5, 6. WEEK 5 (March 24, 26) VaR: Options. Delta-gamma methods. Structured Monte Carlo simulation. Jorion, Value at Risk, Chapter 10, 12 Extra Mina J. and A. Ulmer, Delta-Gamma Four Ways, RiskMetrics Group, LLC,

3 WEEK 6 (March 31, April 2) VaR: Historical simulation. Backtesting, normal and abnormal conditions. Jorion, Value at Risk, Chapter 6. Linsmeier T. and N Pearson,"Value at Risk", Financial Analysts Journal, Scholes MS., Crisis and Risk Management, AEA Papers and Proceedings, May WEEK 7 (April 7, 9) Stress testing, scenario analysis. Coherent risk measures. Extreme value theory. Jorion, Value at Risk, Chapter 10. Artzner P, et al., "Thinking Coherently",Risk, Dowd K, Coherent Risk Measures, Financial engineering News. Handout. Dowd K, Var and Subadditivity, Financial engineering News. Handout. Dowd K, The Extreme Value Approach to VaR An Introduction Part1-4, Financial engineering News. Handout. Haldane A, Why Banks Failed the Stress Test, Marcus-Evans Conference on Stress Testing, Handout. Meyers, G., Coherent Measures of Risk. An Exposition for the Lay Acturary. SECOND HALF: Focus on risk management. WEEK 8 Monday, April 14. Formal class: Risk management and corporates. Hedging Instruments. CFaR. Wednesday April 16. Presentations. Jorion, Value at Risk, Chapter 2, 13. Edwards F.R. and M.S. Canter, The Collapse of Metallgesellschaft: Unhedgeable Risks, Poor Hedging Strategy, or Just Bad Luck?, The Journal of Futures Markets 15 (3) 1995: Risk Mismanagement, Joe Nocera The New York Times, January The World according to Nassim Taleb, - Handout from Web In Defense of VAR, Philippe Jorion, - Handout from Web Jorion, Philippe, Risk management lessons from Long-Term Capital Management, European Financial Management 6 (3, September) 2000: Smith, Donald J., Aggressive corporate finance: a close look at the Procter & Gamble- Bankers Trust leverage swap, Journal of Derivatives 4 (4, Summer) 1997: Stulz, Rene M., 6 Ways Companies Mismanage Risk, Harvard Business Review March Extra Culp, Christopher L. and Merton H. Miller, Metallgesellschaft and the economics of synthetic storage, Journal of Applied Corporate Finance 7 (4, Winter) 1995: Jorion, Philippe, How Long Term Lost its Capital, Risk, September 1999:

4 -- EASTER BREAK WEEK 9 Monday, April 28. Presentations. Wednesday, April 30. Visitor. Michael Parrott, Chief Financial Officer, Tower Investments, Wellington. Trading Risk Management issues in practice: Banking: VaR, managing risk, Treasury; Funds management industry. Jorion, Value at Risk, Chapter 17, 19, 21. Parrott M, Banks Developments in Risk Management, The Treasury Note, March WEEK 10 Monday, May 5. Presentations. Jorion, Value at Risk, Chapter 3. Adrian, T. and H.S. Shin, Liquidity and financial contagion, Financial Stability Review - Special issue on liquidity, Banque de France, No.11, February Keasey, K. and G. Veronesi, Lessons from the Northern Rock affair, Journal of Financial Regulation and Compliance, 16(1), 2008: Gregoriou G.N. and Lhabitant F-S, Madoff: A Riot of Red Flags, EDHEC Risk and Asset Management Research Centre, Position Paper Extra Mainelli, M., Liquidity=Diversity, Journal of Risk Finance, 9(2), 2008: Wednesday, May 7. Harvard CASE: Risk Management at Apache Case: Risk management at Apache. (Handed out the week before class) Froot, Kenneth A., Davis S. Scharfstein and Jeremy C. Stein, A framework for risk management, Harvard Business Review 72 (6, November/December) 1994: Reprinted in the Journal of Applied Corporate Finance, 1994, 7 (3, Fall): Stulz, Rene M., Rethinking risk management, Journal of Applied Corporate Finance 9 (3, Fall) 1996: WEEK 11 Monday, May 12. Presentations. Wednesday, May 14. Harvard CASE: Honeywell, Inc. and Integrated Risk Management. Jorion, Value at Risk, Chapter 16. Case: Honeywell, Inc. and Integrated Risk Management. (Handed out the week before class) 4

5 WEEK 12 Monday, May 19. Formal class: Integrated Risk Management. Jorion, Value at Risk, Chapter 20. Jorion, Risk Management Lessons from the Credit Crisis, European Financial Management, 15, No 5, 2009, Handout. Nocco, Brian W and Rene M. Stulz, Enterprise Risk Management: Theory and Practise, Journal of Applied Corporate Finance 18 (4, Fall) 2006: Extra Coyne T F. and G. Bergmann, "Taking the risk out of Risk Management", InFinsia, Nov/Dec 2006: Wednesday, May 21. Review Time. Variations to the above may occur. 5

6 Grading System The University of Otago grading system will be used. Class Representatives The class (or student) representative system is an avenue for encouraging communication and consultation between staff and students. It provides you with a vehicle for communicating your views on the teaching and delivery of the paper and provides staff with an opportunity to communicate information and gain constructive feedback from students. It contributes to the development of a sense of community within a department and it adds a further dimension to the range of support services offered to students. Volunteers for the role of class representatives will be called early in the semester. The OUSA invites all class representatives to a training session and provides support during the semester. Departmental staff also meet with class representatives during the semester to discuss general issues or matters they wish to have considered. Your class representative s name and contact details will be posted on Blackboard early in the semester. Dishonest Practice and Plagiarism Students should ensure that all submitted work is their own. Plagiarism is a form of dishonest practice (cheating). It is defined as copying or paraphrasing another s work and presenting it as your own. Any student found responsible for dishonest practice in any piece of work submitted for assessment shall be subject to the University s dishonest practice regulations, which may result in serious penalties, including forfeiture of marks for the piece of work submitted, a zero grade for the paper, or in extreme cases, exclusion from the University. The University of Otago reserves the right to use plagiarism detection tools. Students are advised to inform themselves about University policies concerning dishonest practice and take up opportunities to improve their academic and information literacy. If necessary, seek advice from academic staff, or the Student Learning Centre. The guideline for students is available at this link: Concerns about the Course We hope you will feel comfortable coming to talk to us if you have a concern about the course. The Course Co-ordinator will be happy to discuss any concerns you may have. Alternatively, you can report your concerns to the Class Representative who will follow up with departmental staff. If, after making approaches via these channels, you do not feel that your concerns have been addressed, there are University channels that may aid resolution. For further advice or more information on these, contact the departmental administrator or head of department. Disclaimer While every effort is made to ensure that the information contained in this document is accurate, it is subject to change. Changes will be notified in class and via Blackboard. Students are encouraged to check Blackboard regularly. It is the student s responsibility to be informed. 6