Financial Risk Management Contact Information ENG MGT 6215 - PDF document

Financial Risk Management Contact Information ENG MGT 6215 (co-listed with SYS ENG 6615) n Office n 221 Engineering Management David Enke n Phone: 573-341-4749 n enke@mst.edu Professor n http://www.mst.edu/~enke/ Engineering Management and Systems Engineering n Course information Missouri S&T n http://canvas.mst.edu/ enke@mst.edu n http://web.mst.edu/~enke/courses/ENGMGT6215/ http://www.mst.edu/~enke 1 2 Course Textbook Course Information Online Resources n No formal textbook is assigned for the n Meet on Tuesday/Thursday afternoons Financial Risk Management course n 12:30-1:45 pm central n Instructor notes available on Canvas n January 22 nd to May 7 th n Students can refer to the following: n No class/lecture on: n “Risk Management and Financial Institutions,” n March 12 th and 14 th (Spring recess - St. Pats) 5 th Edition, John C. Hull, Prentice Hall , 2018 n Test 1 is due on March 12 th n “Options, Futures, and Other Derivatives,” n March 26 th and 28 th (Spring break) 10 th Edition, John C. Hull, Prentice Hall , 2017 n May 7 th (Test 2 due) n “Investments,” 11 th Edition, Zvi Bodie, Alex Kane, n Class Location: Library, Room G-14 Alan Marcus, McGraw Hill , 2017 3 Homework and Tests Homework and Tests n Four homework assignments n Homework assignments will be made in class n 15% each (60% total) n Late homework will be accepted for a n Calculation problems and computer maximum of two days after the original due assignments (at times using Excel) date (weekend days count) n Two tests n 10% will be deducted for each day the n 20% each (40% total) homework assignment is late n Take home, open book, open notes n Makeup tests that result from schedule n Based on note problems, homework problems, and lecture material conflicts must be approved by the instructor n All assignments due by 12 pm noon central 5 at least one week prior to the test 6 1

Course Resources Course Resources n Instructor homepage n Canvas n http://canvas.mst.edu/ n http://web.mst.edu/~enke/ n Course homepage and lecture schedule n Canvas will contain: n Class lecture notes (presentation slides) n http://web.mst.edu/~enke/courses/ENGMGT6215/ n Students will be notified of major changes n Class handouts to the lecture schedule (test and homework n Any practice problems/solutions (if provided) due dates, topic coverage), both in class n Homework assignments and solutions and by email n Tests and solutions 7 8 Course Resources Course Resources n Canvas notifications and content release n The lecture notes are in Adobe Acrobat pdf format n With the proper settings selected in Canvas, students can be notified of changes to the n One, two, three, and six slide per page availability of course content (notes, test and formats are available homework assignments, grades, etc.) n Adobe Acrobat Reader can be used to n Students can set the updating frequency view the lecture notes n Tests and homework assignments will n http://get.adobe.com/reader/ become available at 12:30 pm central on the date defined on the lecture schedule 9 10 Main Course Concepts Course Topics n Volatility and its Estimation (EWMA, n Estimating Volatilities and Correlations GARCH, Maximum Likelihood Estimation), n Definition of volatility and implied volatilities n Correlation and its Estimation (EWMA, n Estimating volatility from historical data GARCH, Copulas) n Monitoring daily volatility n Value-at-Risk (VaR): Model and Simulation n Exponentially weighted moving average model n The GARCH(1,1) model n Liquidity, Model, and Operational Risk n Choosing between the models n Diversification, Portfolio Theory and n Maximum likelihood methods Portfolio Construction/Management n Using GARCH(1,1) to forecast future volatility n Credit Risk and Credit Derivatives 11 12 2

Course Topics Course Topics n Estimating Volatilities and Correlations cont. n Value at Risk (VaR) n Definition of correlation n Definition of VaR n Monitoring correlation n VaR versus expected shortfall n Multivariate normal distributions n Properties of risk measures n Using EWMA and GARCH n Choice of parameters for VaR n Copulas n Marginal VaR, incremental VaR, and component VaR n Application to loan portfolios n Back testing 13 14 Course Topics Course Topics n Value at Risk (VaR) cont. n Value at Risk (VaR) cont. n Market Risk VaR - Historical Simulation n Market Risk VaR - Model Building Approach Approach n The linear model n VaR historical method n Handling interest rates n Accuracy n Applications of the linear model n Extensions n The linear model and options n Extreme Value Theory n The quadratic model n Applications using historical simulation n Monte Carlo simulation for VaR n Using distributions that are not normal n Model building versus historical simulation 15 16 Course Topics Course Topics n Liquidity Risk n Model Risk n Liquidity trading risk n Marking to market n Liquidity funding risk n The nature of models in finance n Traditional view of liquidity risk n Models for nonlinear products n Liquidity black holes n Physics versus finance n Problems with Long-Term Capital n How models are used for pricing products Management n Hedging n Liquidity versus profitability n Models for actively traded products n Models for structured products n Dangers in model building, detecting problems 18 17 3

Course Topics Course Topics n Operational Risk n Diversification, Portfolio Theory, Portfolio Construction, and Evaluation n What is operational risk? n Determination of regulatory capital n Notions of Risk, Risk and Uncertainty n Categorization of operational risks n Portfolio Risk, Systematic Risk, Non- n Loss severity and loss frequency Systematic Risk, CAPM n Forward looking approaches n Mean-Variance Framework/Procedure n Allocation of operational risk capital n Diversification of Stock and Bond n Use of the power law Portfolios n Insurance n Recommendations for Diversification n Sarbanes-Oxley 19 20 Course Topics Course Topics n Credit Risk n Credit Risk cont. n Estimating Default Probabilities n Credit Risk Losses and Credit VaR n Credit ratings, credit indices n Estimating credit losses n Historical default probabilities, recovery rates n Credit risk mitigation n Estimating default probabilities from bond n Credit VaR prices n Vasicek’s model n Comparison of default probability estimates n Credit Risk Plus n Using equity prices to estimate default n CreditMetrics probabilities 21 22 Course Topics Disclaimer n Credit Derivatives n Nothing presented or discussed in this course should be considered a n Credit default swaps (CDS) recommendation to buy or sell a n Valuation of CDS security or other financial product n Credit indices n The instructor is not a registered n CDS forwards and options financial analysis n Total return swaps n Basket credit default swaps n Collateralized debt obligations (CDO) n Valuation of a basket of CDS and CDO products 23 24 4