Download MIDLANDS STATE UNIVERSITY FACULTY OF COMMERCE

MIDLANDS STATE UNIVERSITY
FACULTY OF COMMERCE
DEPARTMENT OF BANKING & FINANCE
Course Outline: Financial Risk Management (BF410)
Lecturer: Mr N. Nkomazana (Email: [email protected], Cell: 0774 382 517)
COURSE OBJECTIVES
This course will focus on the management of financial risk that portfolio managers encounter,
with special emphasis on market risk. This course will equip students with a variety of risk
management techniques that are available to financial managers, their strengths and
limitations.
ASSESSMENT
Coursework will constitute 30% of the total mark, with the final examination, at the end of
the semester, contributing the remaining 70%. Coursework will be made up of two tests to be
administered during the semester. The course contents are as follows:
COURSE CONTENT
1. Introduction and Overview of Risk
Introduction to risk & risk management
Types and sources of risk (risk and risk factors)
Importance of a risk management focus
2. Infamous Risk Management Disasters
Metallgesellschaft (1993)
Orange County (1994)
Barings bank (1995)
AIG (2008)
Societe Generale (2008)
Subprime Mortgage Losses (2007)
Lessons for risk management
3. How Traders Manage Their Exposures
The “Greek letters” (Delta, Gamma, Vega, Theta and Rho)
Calculating Greek letters
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Taylor series
Hedging exotic options
4. Market risk and Value at Risk (VaR)
Benefits of market risk measurement
Daily Earnings at Risk (DEAR)
Definitions and calculation of VaR
VaR and expected shortfall
VaR and capital
Coherent risk measures
Choice of parameters for Var
Marginal, Incremental and Component VaR
Other approaches to VaR (Historical simulation, The model building approach, Stress
testing and Monte-Carlo simulation)
5. Managing Interest Rate Risk
Management of net interest income
Duration (standard duration, modified duration and dollar duration)
Convexity (standard and dollar duration)
Principal component analysis
Portfolio and Bond immunisation
6. Regulation, Basel II and Solvency II
Reasons for regulating banks
Bank regulation pre-1988 and the 1988 BIS Accord
The G-30 policy recommendations and the 1996 amendment
Basel II and the recent revisions to Basel II
Solvency II
7. Scenario analysis & stress testing
Generating scenarios
Incentives for financial institutions
Subjective vs objective probabilities
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TEXTBOOKS:
A number of alternative textbooks and articles are considered suitable for the material
covered in this course. The following are some of the recommended texts:
 Bohdalova, M. (2007) A comparison of Value–at–Risk methods for measurement of
the financial risk. E-Leader Plague 2007
 Crouhy, M., Galai, D. and Mark, R (2006) The essentials of Risk Management,
McGraw-Hill.
 Fabozzi, F. J. (2007) Fixed Income analysis, 2nd Edition, John Wileys & Sons, Inc
 Hull, J. C. (2010) Risk management and financial institutions, 2nd edition,
InternationalEdition, Pearson
 Jorion, P. (2003) Financial Risk Manager Handbook. 2nd Edition. John Wiley & Sons:
Canada.
 Saunders, A. and Cornett, M. (2008) Financial institutions management: A risk
management approach (6th Edition), Mc Graw-Hill.
 Torben, J. A (2006) Global Derivatives: A strategic risk management perspective, FT
Prentice Hall.
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