Financial Risk Management (aka VAR) Course: Spring 2012

Professor Philippe Jorion

THE PAUL MERAGE SCHOOL OF BUSINESS
UNIVERSITY OF CALIFORNIA, IRVINE


Course Description:

 This course examines modern techniques for managing financial risks. 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. As a result, it is strongly recommended to have taken electives on derivatives (Winter or Spring, concurrently) and fixed-income markets (Winter).

No auditors will be allowed in the course.

Course Materials:

In addition to class notes, the required text is:

Value-at-Risk: The New Benchmark for Managing Financial Risk, by Philippe Jorion, 2006, McGraw-Hill.

We will also use parts of:
Financial Risk Manager Handbook, by Philippe Jorion, 2010 (sixth edition), Wiley.







Value at Risk Course: Schedule for Spring 2012

Note: this schedule may be subject to additional changes. (85%)
Location and time: MPAA 120, 7pm-10pm. Courses are held on Mondays.
  1. Monday April 2 - The Need for Risk Management, Measuring Risk
    Readings: Jorion, Ch 1, 2, 3, 4, 5
    Notes: Introduction, Quantitative Analysis (review), Framework for RM
    Readings: Deutsche Bank's Risk Report; NYT: Jan4,09-Risk Mismanagement; FSA: Jan21,09-The Financial Crisis and the Future of Financial Regulation
    [Optional Readings (light):] Expanding Role of CRO, BW: "More Muscle for Risk Managers", BW: "Risk Manager's Stock is Rising", GARP's Risk Review-The Rise of the Risk Executive
     References: FRM study guide 2011; list of readings -- Web sites: Risk Talent, GARP Career Center
    Very good readings about risk management: Berkelaar (2011), "Risk Mgt for Institutional Funds"; Western Asset Mgt (2010), "Investment Risk Mgt"

  2. Monday April 9 - Measuring VAR, Backtesting VAR
    Readings: Jorion, Ch 5, 6
    Notes: Precision, EVT, Backtesting
    Assignment DUE: Computing VAR for a hedge fund

  3. Monday April 16 - Portfolio Risk, Forecasting Risk, RiskMetrics, Multivariate Models
    Readings: Jorion, Ch 7, 8, 9
    Notes: Tools for Managing Risk, Time-Variation in Risk, Multivariate Models
    RiskMetrics: Summary; RiskMetrics
    Assignment DUE: Measuring the VAR of a bank

  4. Monday April 23 - Approaches to Value at Risk, VAR Mapping, Simulations
    Readings: Jorion, Ch 10, 11, 12
    Notes: Building RM Systems
    Readings: Risk Mgt at PIMCO
    Assignment DUE (Web-based): Orange County Case

    Thursday April 26 - Review Session?

  5. Monday April 30 - Stress Testing, Liquidity Risk
    Readings: Jorion, Ch 13, 14
    Notes: Stress Tests, Valuation and Liquidity Risk
    RiskGrades: Link; Summary, BW Article
    Assignment DUE: Mapping Financial Instruments

  6. Monday May 7 - Hedge Funds
    Readings: FRM Handbook Ch 30
    Notes: Hedge Fund Risk Management
    [Optional Readings on Hedge Funds:] Best Practices for Hedge Fund Investors (2008), Lo (2005) "Systemic Risk and Hedge Funds", Jorion (2008) "Risk Mgt for Event-Driven Funds"
    Reference: CAIA Risk Management for Alternatives (2009)
    [Optional Readings (light):] Article on traders: New Yorker--Blowing Up

    Thursday May 10 - Review Session?

  7. Monday May 14 - Credit Risk: Introduction, Default Risk, Exposure
    Readings: Jorion, Ch 18; FRM Handbook, Ch 19, 20, 21, 22
    Assignment DUE: Building a Risk Management System

  8. Monday May 21 - Credit Derivatives, Credit Risk VAR Models, Basel Rules
    Readings: FRM Handbook, Ch 23, 24; 28
    Notes: Credit Derivatives, Regulatory Requirements
    [Optional Readings (light):] FT-The Birth of Credit Derivatives

  9. Monday May 28 - No class (Memorial Day)

  10. Monday June 4 - Operational Risk, Integrated Risk Management, Challenges in Risk Management, LTCM
    Readings: Jorion, Ch 19, 20, 21, 22
    Notes: Operational Risks, ERM, Pitfalls in RM
    [Optional Readings:] Economist: Financial Risk--Why some banks did much better than others (Feb 11, 2010); Economist: Risk Managers (May 2008)
    Thursday June 7 - Review Session?

  11. Monday June 11 - Final
    Open book, bring a calculator (no laptop)
    Preparation: Sample Final , Solution
Philippe Jorion's home page

© 2012 - Philippe Jorion.
Please note that the lecture materials are protected by copyright.
Duplicating course material for any commercial purposes without written permission of the lecturer is prohibited.