FRM - Course Outline

Course Incharge          Attaullah Shah ( attaullah.shah@imsciences.edu.pk )

 

Summary

 

This course will focus on variety of risks faced by financial managers and the tools available for managing these risks. Particularly, we shall focus on credit risk, interest rate and liquidity risks, market risk, foreign exchange risk, and country risk. We shall learn about the tools and techniques available for managing these risks such as future contracts, option contracts, swaps, value-at-risk (VaR) and other standard risk-hedging techniques, and methods of measuring volatility. Students attending this course are expected to have studied basic courses of investment and portfolio management and have good understanding of asset pricing models.    

 

Course Books

 

There is no single book that will cover all the topics included in this course. Selected chapters from the following books will be covered in the course. Also, additional reading materials will be made available at the website of the course: http://sites.google.com/site/imspeshawar (remember do not include the prefix www to the website address

 

  1. Hull, John C., 2007, Risk Management and Financial Institutions (RMFI), Prentice-Hall.
  2. Hull, John C., 2006, Options, Futures, and Other Derivatives [OFOD], Prentice-Hall (sixth edition).
  3. Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffery F., & Roberts, Gordon S., Corporate Finance, Any Edition, McGraw Hill Ryerson, 1999. [Referred to below as “RWJR”]
  4. Risk Management and Derivative by Rene Stulz, second edition

 

Course outline

 

1.      Introduction

      a. Motivation for risk management, 

      b. Why risk management,

     c. Creating value with risk management, 

    d. Finding risk and return for an asset and portfolio

    e. Efficient Frontier, capital market theory, CAPM

 

2.      Financial engineering: 

    a. Basics of derivatives

    b. Forwards, Pricing Forward contracts under assumptions of dividends, carrying costs

    c. Futures, Settlement mechanism, clearing house concept, Hedging with futures and forward contracts [OFOD]

    d. Swaps, an alternative to future contracts, examples [ RWJR chapter 24]

    e. Basic and exotic options, Basics of options valuation, valuation of options using Black-Scholes model, [OFOD]

    f. Duration hedging [ RWJR chapter 24]

     

      3.  Measuring volatility and Correletions

      a. Conditional and unconditional volatility

      b. Weighted and unweighted conditional volatility

      c. EWMA and GARCH(1,1) approaches to volatility

      d. Estimating Covariance - Unweighted, 

     e. Covariance with EWMA and GARCH(1,1)


4.  Market risk

          a. VaR (value at risk) measurement 

          b. (RiskMetrics, historical, and Monte Carlo approaches), 

          c. Back-testing, 

          d. Stress testing,

          e. Alternative risk measures


  5.  Liquidity risk

 
  6.   Credit risk: 
        
            Basel II
          
        

  Merton model, 

  Modern structural and reduced-form models, 

  Credit derivatives


7. Operational Risk



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