THE UNIVERSITY OF HONG KONG School of Economics and Finance FINA0601/ FINA4341 Quantitative Risk Management

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1 THE UNIVERSITY OF HONG KONG School of Economics and Finance FINA0601/ FINA4341 Quantitative Risk Management GENERAL INFORMATION Instructor: Dr. Grace Xing Hu Office: Room 818 K.K.Leung Building Phone: Office Hours: By appointment Semester: 2 Lecture: Thursday 13:30-16:20 in KKLG103 Tutor: TBA Pre-requisites: ECON1001/ECON1210 Introductory microeconomics and FINA0402/ FINA3350 Mathematical Finance Course Website: Moodle COURSE DESCRIPTION The objective of this course is to introduce concepts, techniques and framework for quantitative risk management at financial institutions. Financial firms, with their complicated list of positions in a mixture of instruments, are exposed to various sources of financial risk. This class focuses mainly on market risk, the risk of unexpected changes in prices and rates. The first part of the course introduces basic concepts in risk management and builds the toolkit for measuring risk quantitatively. The second part of the course is devoted to studying the widely accepted Value at Risk (VAR) systems, including calculations, back testing and flaws of VAR. The course also touches on other aspects of financial risk such as liquidity risk, credit risk and operational risk.

2 COURSE LEARNING OBJECTIVES (CLOs) 1. Learn the general concept of risk and risk management. Understand different sources of risk faced by financial institutions, how they manage risk internally and the related regulation requirement. 2. Acquire quantitative tools for measuring risk and know how to apply these techniques for hedging. 3. Understand the framework of Value-at-Risk. Use both analytic and simulation approaches to estimate VaR for single derivatives and complicated portfolios. Understand the pros and cons of different VaR estimation methods. 4. Know how to do back testing for VaR using historical data. Understand the limitation and flaws of VaR. COURSE LEARNING OUTCOMES Course Learning Outcomes CLO1, COL2, COL3 CLO2, COL3, COL4 CLO1, CLO3 Aligned Programme Learning Outcomes PLG1. Acquisition and internalization of knowledge of economics and finance PLG2. Application and integration of knowledge PLG3. Inculcating professionalism and leadership CLO1 CLO1, CLO4 COURSE TEACHING AND LEARNING ACTIVITIES PLG4. Developing global outlook PLG5. Mastering communication skills Expected contact hour Study Load Course Teaching and Learning Activities (% of study) T&L1. Lectures and Class Participation 36 55% T&L2. Assigned Individual Homework 9 14% T&L3. Group Projects 18 28% T&L4. Consultation 2 3% Total %

3 Assessment Methods Brief Description (Optional) Weight Aligned Course Learning Outcomes A1. A2. Class Participation Three Individual Assignments 5% 20% COL1,COL2,COL3,COL4 COL1,COL2,COL3,COL4 A3. A4. STANDARDS FOR ASSESSMENT Course Grade Descriptors One Group Project 50% Final Exam 25% Total 100% COL1,COL2,COL3,COL4 COL1,COL2,COL3,COL4 A+, A, A- B+, B, B- C+, C, C- D+, D F Strong evidence of superb ability to fulfill the intended learning outcomes of the course at all levels of learning: describe, apply, evaluate, and synthesis. Strong evidence of the ability to fulfill the intended learning outcomes of the course at all levels of learning: describe, apply, evaluate, and synthesis. Evidence of adequate ability to fulfill the intended learning outcomes of the course at low levels of learning such as describe and apply but not at high levels of learning such as evaluate and synthesis Evidence of basic familiarity with the subject. Little evidence of basic familiarity with the subject.

4 COURSE CONTENT AND TENTATIVE TEACHING SCHEDULE Week 1, 2 Week 2,3 Week 4 Week 5 Week 6,7 Week 8,9 Week 10 Week 11 Introduction of Market Risk, Liquidity Risk, Credit Risk and Operational Risk. Regulation, Basel 1 and Basel 2. Interest Risk, Distribution of Asset Returns and Volatility Models. Tools for Measuring Risk. Greeks, Taylor Series Expansion and Hedging. Introduction of VaR. Analytical Approaches. Simulation Approaches. Back Testing. Limitation and Flaws of VAR. Scenario Analysis and Stress Testing. In-class discussion of HBS Case 1 and Guest Lecture. Week 12 Review Session and Group Project Presentation of HBS Case 2. REQUIRED/RECOMMENDED READINGS & ONLINE MATERIALS Textbook: John C. Hull. Risk Management and Financial Institutions. Second Edition. Prentice Hall. Cases: 1. F&S Investments: Understanding Value at Risk by Stephen Sapp. 2. Value At Risk by Stephen Lynagh and Sanjiv R. Das. Note: It is COMPULSORY for all FINA0601 students to purchase the above cases and pay to the SEF General Office. Students are forbidden to make unauthorized copies of the cases for themselves.

5 References: 1. Philippe Jorion. Value at Risk, the new benchmark for managing financial risk. Third Edition. McGraw Hill. 2. Alexander J.McNeil, Rudiger Frey and Paul Embrechts. Quantitative Risk Management: Concepts, Techniques and Tools. Princeton University Press. 3. John C. Hull. Options, Futures, and other derivatives. Eighth Edition. Prentice hall. COURSE POLICY Class Conduct Students are required to attend all classes on time. If students are 30 minutes late or more, they will be regarded as not having attended the class. In case you have to leave the class early, please inform the instructor before the class begins. Please sit near the door and exit quietly. If you fail to inform the instructor before you leave, no credit will be given for your class attendance. Respect your instructor and your fellow students. Be considerate to others. Academic Dishonesty The University Regulations on academic dishonesty will be strictly enforced! Please check the University Statement on plagiarism on the web: Academic dishonesty is any act that misrepresents a person s own academic work or that compromises the academic work of another. It includes (but not limited to) cheating on assignments or examinations; plagiarizing, i.e., representing someone else s ideas as if they are one s own; sabotaging another s work. If you are caught in an act of academic dishonesty or misconduct, you will receive an F grade for the subject. The relevant Board of Examiners may impose other penalty in relation to the seriousness of the offense.

6 Assessment Rubrics for Project Presentation Grade A Grade B Grade C Grade D Grade F Addressing the Task Understanding, Analysis, Synthesis, and Application of Knowledge Argumentation Structure / Organization Identifies and addresses clearly the main question(s) and the subsidiary, embedded, or implicit aspects, addressing their relationships to each other. Consistent perceptive and critical engagement with issues and themes based on comprehensive understanding of relevant concepts and theories; the analysis, synthesis and application of knowledge is consistently clear and effective. Examines the question/ issue/problem from all important perspectives. Overall logic is clear. Premises or evidence strongly support conclusions. Counterevidence or rival positions addressed. Arguments fit together and build a compelling case. The presentation provides an outline which clearly introduces the structure and a conclusion that clearly summarizes the main ideas / arguments. Transitions from one main idea / argument to the next are always clear to the listener through the use of signaling phrases such as the next point the final section etc. Identifies and addresses the main question(s) and some but not all of the subsidiary, embedded or implicit aspects. Generally perceptive and critical engagement with issues and themes; some shortcomings in understanding of relevant concepts and theories, but the analysis, synthesis and application of knowledge is mostly clear and effective. Examines the question/ issue/problem from most of the important perspectives. Expresses own position, and argumentative structure is clear and logical, but some arguments underdeveloped or some considerations overlooked. The presentation provides an outline which introduces the structure and a conclusion that summarizes the main ideas / arguments but one or both could be more comprehensive. Transitions from one main idea / argument to the next are almost always clear to the listener through the use of signaling phrases such as the next point the final section etc. The listener is always able to follow the development of the main arguments. Identifies and addresses the main question(s) but does not address the subsidiary, embedded or implicit aspects. Occasional perceptive and critical engagement with issues and themes, but essay tends toward rather superficial understanding of relevant concepts and theories, with some inaccuracies in the analysis, synthesis and application of knowledge. Some important perspectives or issues are not recognized. Not all relevant arguments and counter arguments are fully examined. Offers own position but reasoning is sometimes impaired by weak, emotive, or inconsistent argumentation. The presentation attempts to provide an outline which introduces the structure and / or a conclusion that summarizes the main ideas / arguments. If both are present, one or both may be unclear or lacking in enough detail. Transitions from one main idea / argument are sometimes unclear to the listener through a lack of or unclear use of signaling phrases such as the next point the final section etc. However, the listener is able to follow the development of most of the main arguments. Identifies part of the main question(s) and only addresses the question(s) partially. Very limited critical engagement with key issues and themes; rarely goes beyond reproduction of relevant concepts and theories, impaired in parts by considerable inaccuracies. Examines things from a single perspective. Only minimal examination of relevant arguments and counterarguments. Offers own position, but the arguments are not put forward explicitly and not well supported. The presentation fails to provide an outline which introduces the structure of the presentation or a conclusion that summarizes the main ideas / arguments. If one is present, it is unclear or lacking in enough detail to be useful to the listener. Transitions from one main idea / argument are often unclear to the listener through a lack of or unclear use of signaling phrases such as the next point.. the final section.. etc. However, the listener is able to follow the development of some of the main arguments. Lacks an understanding of what the question requires or responds inappropriately or tangentially to the task or topic. No critical engagement with issues, and themes. Essay characterized by serious inaccuracies and misunderstandings. Arguments are confused and illogical. Student fails to present and defend a coherent position. Offers own position, but arguments are flawed, disorganized, or difficult to identify or understand. There is no outline or conclusion. Transitions from one main idea / argument are unclear because of a lack of signaling. The listener is not able to follow the development of any of the main arguments. Delivery Presenter(s) adhere strictly to time limits set. Presenter(s) engage the audience at all times through the skillful use of eye contact, gestures, variation in voice, attractive and professional looking visual aids. Presenter(s) adhere strictly to time limits set. Presenter(s) engage the audience through the use of eye contact, gestures, variation in voice, attractive and professional looking visual aids although one or two of these could be done better in places. Presenter(s) may be slightly off the time limits set. Presenter(s) engage the audience most of the time through the use of eye contact, gestures, variation in voice, attractive and professional looking visual aids although one or two are ineffective in parts of the presentation. Presenter(s) may be significantly off the time limits set. Presenter(s) attempt to engage the audience some of the time through the use of eye contact, gestures, variation in voice, attractive and professional looking visual aids but with limited overall effectiveness. Presenter(s) do not adhere to the time limits set. Presenter(s) seem to make little attempt to engage the audience eye contact, gestures, variation in voice, attractive and professional looking visual aids. All are ineffective throughout the presentation.

7 Mechanics Spoken language is always accurate, comprehensible, fluent, and precise. Pronunciation is clear at all times. Any grammatical errors are infrequent and do not draw the listener s attention. Spoken language is mostly accurate, comprehensible, fluent and precise with a few hesitations. Pronunciation is generally clear. Any grammatical errors are infrequent and only rarely draw the listener s attention. Spoken language is generally comprehensible and fluent but not always accurate and precise. At times, strain is placed on the listener, especially because of hesitations and/ or pronunciation and grammar. The language is often inaccurate and imprecise and occasionally incomprehensible but most of the main arguments can be followed with effort. Quite frequent strain is placed on the listener, especially because of hesitations and/ or pronunciation and grammar. The language is mostly incomprehensible and many of the main arguments are unclear, especially because of frequent hesitations in almost every sentence and/ or pronunciation and grammar.

8 Assessment Rubrics for Project Reports Grade A Grade B Grade C Grade D Grade F Addressing the Task Understanding, Analysis, Synthesis, and Application of Knowledge Argumentation Structure / Organization Identifies and addresses clearly the main question(s) and the subsidiary, embedded, or implicit aspects, addressing their relationships to each other. Consistent perceptive and critical engagement with issues and themes based on comprehensive understanding of relevant concepts and theories; the analysis, synthesis and application of knowledge is consistently clear and effective. Examines the question/ issue/problem from all important perspectives. Overall logic is clear. Premises or evidence strongly support conclusions. Counterevidence or rival positions addressed. Arguments fit together and build a compelling case. Introduction states clearly writer s thesis or position, and conclusion clearly summarizes main arguments. Paragraphing is appropriate at all times with each paragraph containing a central idea which is developed throughout the paragraph with supporting details. Identifies and addresses the main question(s) and some but not all of the subsidiary, embedded or implicit aspects. Generally perceptive and critical engagement with issues and themes; some shortcomings in understanding of relevant concepts and theories, but the analysis, synthesis and application of knowledge is mostly clear and effective. Examines the question/ issue/problem from most of the important perspectives. Expresses own position, and argumentative structure is clear and logical, but some arguments underdeveloped or some considerations overlooked. Introduction states writer s thesis or position, and conclusion summarizes main arguments. Paragraphing is appropriate, but some paragraphs lack supporting detail or contain unrelated details. Identifies and addresses the main question(s) but does not address the subsidiary, embedded or implicit aspects. Occasional perceptive and critical engagement with issues and themes, but essay tends toward rather superficial understanding of relevant concepts and theories, with some inaccuracies in the analysis, synthesis and application of knowledge. Some important perspectives or issues are not recognized. Not all relevant arguments and counter arguments are fully examined. Offers own position but reasoning is sometimes impaired by weak, emotive, or inconsistent argumentation. Introduction and conclusion are included but do not fully capture the essence of the topic and discussion. Evidence of ability to paragraph, but some paragraphs lack a central idea or supporting detail Identifies part of the main question(s) and only addresses the question(s) partially. Very limited critical engagement with key issues and themes; rarely goes beyond reproduction of relevant concepts and theories, impaired in parts by considerable inaccuracies. Examines things from a single perspective. Only minimal examination of relevant arguments and counterarguments. Offers own position, but the arguments are not put forward explicitly and not well supported. Topic is not properly introduced and conclusion is very brief. Ability to construct a paragraph with a central idea and supporting details somewhat limited. Lacks an understanding of what the question requires or responds inappropriately or tangentially to the task or topic. No critical engagement with issues, and themes. Essay characterized by serious inaccuracies and misunderstandings. Arguments are confused and illogical. Student fails to present and defend a coherent position. Offers own position, but arguments are flawed, disorganized, or difficult to identify or understand. Introduction and conclusion are unclear, lack detail or missing altogether. Very little evidence of an ability to organize the essay into paragraphs with one central idea and supporting details. Mechanics The language contains very few, if any, errors in grammar and vocabulary. If slips are present, the meaning is still clear. Conventions of academic writing (e.g. citation, references, footnotes, etc.) are followed meticulously. The language is mostly accurate but contains a few systematic errors in complex grammar and vocabulary. Conventions of academic writing (e.g. citation, references, footnotes, etc.) are mostly followed. The language is sometimes inaccurate, although errors, when they occur, are more often in complex grammar and vocabulary. Errors when they occur are distracting but the overall meaning is still intelligible. Conventions of academic writing (e.g. citation, references, footnotes, etc.) show some inconsistencies. The language contains frequent errors in simple and complex grammar and vocabulary. Errors are distracting and effort has to be made to understand the main arguments. Conventions of academic writing (e.g. citation, references, footnotes, etc.) show significant inconsistencies and may contain errors. Errors in language and vocabulary are so frequent and distracting that the essay is largely incomprehensible. Does not adhere to the conventions of academic writing (e.g. citation, references, footnotes, etc.).