MFIN5611 Financial Risk Management
In recent years, the financial markets have been thrown into turmoil by an ongoing series of financial crises, most recently the credit crisis of 2007-2009. The complexity and widespread use of financial derivatives have been blamed for increasing the severity of these crises, leading to calls for further regulation of the derivatives markets. These crises have demonstrated the necessity of proper risk management procedures, as evidenced by the spectacular collapse of Bear Stearns and Lehman Brothers. Since derivatives are extremely risky but powerful hedging tools, it is imperative that market participants gain a fundamental understanding of their properties in order to efficiently manage risk and prevent future financial meltdowns. This course provides a thorough analysis of the key features of derivative securities along with strategies for managing risk with these instruments. The measurement of market risk is covered in great detail, with a focus on the Value at Risk (VaR) methodology. VaR is used to determine the potential losses that could occur in a portfolio with a specified level of confidence. Unlike earlier risk measures, VaR has the advantage that it can be applied to any financial asset, so that the risk of a portfolio may be determined regardless of its composition. One drawback to VaR is that it is derived from several questionable assumptions and may seriously understate the potential losses to a portfolio during severe market downturns. Alternatives to VaR, such as Expected Shortfall, are examined.