Financial Risk Management - (F) - Q4

Participation Prerequisites

Capital Markets and Financial Instruments: Basic knowledge of financial instruments like bonds, stocks, and derivatives (options, swaps, forwards).
Basics of Probability and Statistics: basic rules of probability calculus, discrete and continuous distribution functions, moments of random variables and functions of random variables, quantiles, sampling, estimation of mean, variances, and quantiles.
Microsoft Excel: Some experience in creating, saving, and editing spreadsheets will be helpful. No VBA programming will be used.

Course Content

1 Concepts and Methods in Financial Risk Management
Section 1 introduces the general approach of financial risk management in financial institutions, insurance companies and corporates. The Section covers basic economic, organisational, and quantitative topics in financial risk management. Quantitative key risk indicators like Value-at-Risk and Expected Shortfall as well as stress-testing approaches are introduced.
2 Applications in Market Risk
Section 2 introduces risk indicators like Value-at-Risk and Expected Shortfall to analyse the market risk of portfolios of financial instruments. The issues are discussed based on simple sample portfolios, where all steps of risk analysis are developed from the scratch.
3 Applications in Credit Risk
Section 3 applies general risk management approaches introduced in Section 1 to the analysis of credit risk. Credit risk with respect to single claim risk and portfolios is analyzed. Issues discussed in this Section cover questions of rating systems, probabilities of default, exposure calculation, as well as approaches to quantify dependency of credit risks. Issues in risk-adjusted pricing of credit instruments like bonds and loans are also being discussed.
4 Applications in Operational Risk
Section 4 gives a short introduction to issues of Operational Risk in Financial Risk Management. The focus of this Section is on differentiating operational risk from credit risk and market risk. An overview over current practices of operational risk measurement and management is given.
5 Liquidity Risk
Section 5 introduces the basics of liquidity risk management. The most important types of liquidity risk are discusses as well as typical approaches to manage these risks.
6 Current Developments in Financial Markets Regulation
The design and the structure of international financial markets regulation has been heavily revised by the Basel Committee on Banking Supervision (BCBS) in the years following the 2007/2008 financial crisis. Major parts of this process have been finalised recently. This Section delivers an overview over current financial markets regulation - having a focus on those topics most relevant for financial risk management.

Intended Learning Outcomes and Competencies

•Adequate use and judgement of basic risk management and measurement methods in finance
•Interpretation of Value-at-Risk and other key risk figures
•Distinctions between market risk and credit risk in financial markets
•Financial markets regulation

Form of Examination

Literature

Financial Instruments and Markets:

Bodie, Z. / Kane, A. / Marcus, A.J. (2020): Investments, 12th ed. McGraw-Hill

Hull, J.C. (2021): Options, Futures, and Other Derivatives, 11th ed., Pearson

Risk Management:

Crouhy, M. / Galai, D. / Mark, R. (2014): The Essentials of Risk Management, 2nd ed, McGraw Hill

Hull, J.C. (2018): Risk Management and Financial Institutions, 5th ed, Wiley

McNeil, A. / Frey, R. / Embrechts, P. (2015): Quantitative Risk Management. Concepts, Techniques and Tools, rev. ed. Princeton University Press

Saunders, A. / Cornett, M. M. (2020): Financial Institutions Management. A Risk Management Approach. 10th ed., McGraw Hill

Methods:

DeGroot, M. / Schervish, M. (2014): Statistics and Probability, 4th ed., Pearson

Sydsaeter, K. / Hammond, P. / Strøm, A. / Carval, A. (2022):
Essential Mathematics for Economic Analysis, 6th ed., Pearson