financial risk management course syllabus. personal information instructor name: ming-yuan leon li...
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Financial Risk Management
Course Syllabus
Personal Information
• Instructor Name: Ming-Yuan Leon Li
• Instructor Tel: Ext 53421
• E-mail: [email protected]
• Office Hours: – Wednesday: 10:00-12:00 AM
• Office Number: 63315
Course Descriptions/Objectives
• Help students to better understand the topic relating to “financial risk management” by textbook studying and extra handouts.
• The goals of this course are the following :– Provide quick access to the whys and how of risk man
agement – Provide easy-to-understand information, including equ
ations and examples that can be quickly applied to most risk management problems.
– Provide information about how risk measurement is used in the management of risk and profitability
Course Descriptions/Objectives
• After studying the course , you should be able to answer the following four questions:– How much could we lose ?– Can we absorb a significant loss without going
bankrupt?– Is the return high enough for us to take risk?– How can we reduce the risk without significant
ly reducing the return?
Grading
• 1st Exam (25%): held in the 7th week
• 2nd Exam (25%): held in the 13th week
• 3rd Exam (30%): held in the 18th week
• Class participation (20%)
Grading
– Class participation• Homework
–Writing report and/or oral report
• Quick Quiz–In the ending of each chapter, I will
provide a quick quiz including several simple questions to review today's content
–Your performance will be evaluated into your score
Textbook
• Chris Marrison, Fundamental of Risk Measurement– Book store: 新陸書局– Mr. 江 , 0936-968488– TEL: 02-2381-9277
Course Calendar/Schedule
• Before 1st Exam:– The Basic of Risk Management (Ch 1 to Ch 2)– Market Risk Management (Ch 5 to Ch 8)
• Between 1st and 2nd Exam:– Market Risk Management (Ch 9 to Ch 11)– Asset Liability Risk Management (Ch 12 to Ch 13)
• After 2nd Exam:– Asset Liability Risk Management (Ch 13 to Ch 15)– Credit Risk Management (Ch 15 to Ch 19)
Course Policies
• The purpose of this class is to identify the hidden agenda in this subject
• I will follow the textbook to present the important topics of risk management, especially for banks
• It is expected that every student attend all classes and take all examinations when scheduled
• In order to maximize your learning and to receive credit for your classes, you must attend at least 80% of classes
Slides
• The slides in PowerPoint file
• How to find them– My personal web-site– http://140.116.51.3/chinese/faculty/mingyuan/
myweb11/index.htm
• Some suggestions– Download them and study them before the
class
Certain Important Perspectives Review
• What is the risk?– A potential loss in the future
• How to measure the risk– Use the historical data to simulate the distribution of
return rate of your portfolio– For example, 2-year data to picture the distribution
curve– Assume the return rate in the next trading day will be
drawn from the same distribution• How to picture the distribution?
– Mean and Standard errors – Correlation coefficients
Some Important Perspectives Review
• Two Examples– The daily return rates of U.S. S&P 500 stock i
ndex– The daily return rates of Taiwan company: Ac
er 2353
Distribution of Return Rate for U.S. Market
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
-4 -3 -2 -1 0 1 2 3 4
Use 2-yea data (near 500 daily return rates data) to simulate the underlying distribution of return rates of our portfolio
Rt, for t=1 to 500
Assume the return rate in the next trading day is drawn from the same distribution
Rt, for t=501,502, …
Standard error, σ
Standard error, σ
If we assume the return rate follows the normal distribution, then the potential loss can be presented by standard error
Distribution of Return Rate for U.S. Market
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
-4 -3 -2 -1 0 1 2 3 4
Standard error, σ (0.94%)
Standard error, σ
(1)If we assume the return rate follows the normal distribution, then the potential loss can be presented by standard error
(2) The P[ return rate<-2.33Xσ]=1%
The P[ return rate<-1.96Xσ]=2.5%
The P[ return rate<-1.645Xσ]=5%
(3) If we assume the initial investment money is 100,000, the loss of ”>100,000X 2.33Xσ” in the next day will have 1% probability of occurrences
Homework (1)
• Please pick up one company• Figure the distributions of their daily stock price
returns• One-year daily data at least• Estimate its mean and standard error • Assume the initial investment is 1 million dollars
(1,000,000)
• Calculate the potential 1% loss in the next day
Homework (1)
• Does the distribution follow a normal distribution?– Normalize the returns: (returns-mean)/SD– The 1% critical value of the distribution vs. 2.3
3
More Discussions
• One asset versus Portfolio?– Variance and covariance/correlation– Risk contribution?– stock: 100 units, bond: 50 units; – Q: a portfolio=stock + bond: 150 units?
• Normal distribution?
• Other types of risk?
Structure of Financial Risk Management
• Define the risk– Market risk– ALM risk
• ALM interest rate risk• ALM liquidity risk
– Credit risk
• Measure the risk– Use the historical data to picture the
distribution of the loss
Structure of Financial Risk Management
• Manage the risk– Reduce the risk
• Hedge• Diversification
– Capital preparation– Risk allocation
• Which unit takes the risk?
– Performance evaluation• Risk-adjusted performance
Market Risk
Credit Risk
Floating rate vs. Fixed rate: interest rate risk
Long-term vs. short-term: Liquidity Risk