Indian Institute of Management, Kashipur
Post Graduate Program in Management
Financial Risk Measurement and Management
Term V, 2020-21
Credit: 1
Instructors
Name: Dilip Kumar
Contact Info: D-2/8, [email protected]
Office Hours: During 1 hour period immediately after the class. No appointments required.
Prerequisites: Nil
Course Description
Risk management has emerged as a very important component to a firm’s financial well-being.
In order to stay viable, firms need to determine which risks they are exposed to, which risks the
firm should keep, moderate, or ultimately eliminate. This course is designed to provide a solid
foundation in the principles of financial risk management. It attempts to strike a balance between
institutional details, theoretical foundations, and practical applications. This course presents and
analyses financial risks such as market risks, credit risks, and operational risks; and management
of these risks using various financial instruments. Emphasis in this course will be on
identification of the sources of financial risks; measurement of risks and management of risks.
The course is full of hands-on and implementation of tools and techniques using market data.
The course will provide the practitioner’s perspective in measuring various kinds of financial
risks.
Course Objectives
At the end of this course, you will:
• Understand how to quantify financial risk as number with perspective of measuring it
o Understand what is Value-at-Risk
o Understand how to estimate VaR (from perspective of measuring market risk) of single asset,
portfolio and single asset influenced by many factors using various tools
• Understand basics of estimating VaR of fixed income security
• Understand basics of estimating VaR of derivatives
• Understand basics of estimating VaR from perspective of credit risk measurement (CreditMetrics)
• Understand how to measure credit risk
o Understand probability of default/expected default frequency and to estimate it
• Understand basics of estimating VaR from perspective of operational risk
o Understand Aggregate Loss Distribution/Loss Distribution Approach
• Understand liquidity risk.
• Understand BASEL regulations
• PLO1a/f: Understand to apply the risk analytics in managing financial risk of the entity
Required Textbook
John C. Hull, Risk Management and Financial Institutions, Wiley
Philippe Jorion, Financial Risk Manager Handbook (6th edition), Wiley Publication. ISBN:978-81-265-
4408-0.
Pedagogy and Course Requirements
The course will be primarily taught though a combination of class discussions, quizzes, term-
long project, and presentations.
Class Discussions
The class discussion will involve the readings assigned for the class, which may include book
chapters, articles, and cases. You are expected to have done all the assigned reading and to
actively participate in these discussions.
Quizzes
N quizzes will be given at random and without announcement. Each quiz will cover the material
assigned for and/or discussed in that class. If you are late for class, you will not receive extra
time to complete the quiz. The missed quizzes shall not be made up under any circumstances and
you will receive zero points.
Term-long Project
Project will be assigned to groups (of 4 or 5 students) by the faculty. Each group will provide a written
report of their project work at the end of the term, but before the presentation is scheduled.
Assignment
The questions for assignment will be announced during class and students have to submit it
before a given deadline.
Presentation
Each project team will make a presentation of their work in the class. Each member must present
an equitable share of the overall team presentation. Instructor will let you know beforehand the
time allowed for your presentation.
Grading
Mid-Term Exam 25%
End-Term Exam 25%
Quiz 20%
Project (group) 15%
Assignment 10%
Presentation 5%
The individual grades for the group-component will be calculated as follows: 70% of the team
grade + 30% of the peer evaluation grade.
Tentative Class Schedule
(Additional readings, cases, and articles may be assigned as they become available)
Session Topics Readings Assignments
1-2 Basic ideas in risk management · Chapters 1 and 5 (Hull)
· Class hand-outs and other reading
material
3-9 Market Risk Analysis (Part – I) · Hull (Chapters 8 to 13), Class
for single asset (hands-on): Hand-outs and other reading
a. Introduction to market risk materials
b. Risk management by traders
c. Tools for measuring market
risk (Introduction to Value at
Risk (VaR))
d. Various VaR models
(Historical Simulation, Monte
Carlo Simulation (for both
equity and options),
RiskMetrics)
e. Volatility and correlation
estimation
f. GARCH model(s) and VaR
estimation
g. Advanced VaR models
h. Comparison of VaR estimates
across various models
i. Backtesting VaR models
10-14 Market Risk Analysis (Part – Class Hand-outs and other reading
II) for portfolio and an asset materials
influenced by various factors
(hands-on):
a. Standard Covariance/
Correlation approach
b. RiskMetrics
c. Monte Carlo Simulation
d. Multivariate GARCH
e. VaR of factors
f. VaR for Fixed Income
15-20 Credit Risk (with hands-on ): Chapters 18 to 21 (Hull), Class
a. Introduction to credit risk Hand-outs
b. Default Risk
c. Managing credit risk
d. Estimating VaR for credit
Risk (CreditMetrics)
e. Default probabilities, Agency
ratings, Credit scoring and
Internal rating models
f. Structural models for credit
risk (Merton, KMV)
g. Reduced form models
21-22 Operational and Liquidity risk · Chapter 23, 24 (Hull), Class
a. Introduction to operational handouts
risk with evidence of · Other reading material
operational failures
b. Estimating VaR for
operational risk (Aggregate
Loss Distribution)
c. Operational risk management
framework
d. Operational risk process
models
e. Liquidity trading risk and
Liquidity funding risk
f. Market VaR adjustment with
Liquidity Risk
23-24 Regulation · Chapters 15 and 16 (Hull)
a. The Regulatory and Corporate · Student participation and
Environment presentation
b. BASEL I, II and III
c. Market Risk Charge
d. Economic credit capital
calculation (Basel approach)
e. Allocation of operational risk
capital
Course Policies
1. Responsibility for Course Materials: You are responsible for all material covered in
class. If you are absent, you are responsible for obtaining the information you missed.
2. Classroom Behavior: We expect you to participate in class activities in a mature and
appropriate manner. Disruptive or otherwise unacceptable behavior will not be tolerated.
3. Mobile and Laptop Use: Mobiles are not permitted in the classroom. Carry laptop in
every class but I will let you know beforehand when to open laptop.
4. Academic Conduct: All members of the academic community at IIM Kashipur are
expected to practice and uphold standards of academic integrity and honesty. Academic
integrity means representing oneself and one’s work honestly. Misrepresentation is
cheating since it means students are claiming credit for ideas or work not actually theirs
and are thereby seeking a grade that is not actually earned. Following are some examples
of academic dishonesty:
i. Cheating on quizzes and examinations. This includes using materials such as
books and/or notes when not authorized by the instructor, copying from someone
else’s paper, helping someone else copy work, substituting another’s work as
one’s own, theft of exam copies, or other forms of misconduct on exams.
ii. Plagiarizing the work of others. Plagiarism is using someone else’s work or
ideas without giving that person credit; by doing this students are, in effect,
claiming credit for someone else’s thinking. Whether students have read or heard
the information used, they must document the source of information. When
dealing with written sources, a clear distinction should be made between
quotations (which reproduce information from the source word-for-word within
quotation marks) and paraphrases (which digest the source of information and
produce it in the student’s own words). Both direct quotations and paraphrases
must be documented. Even if students rephrase, condense or select from another
person’s work, the ideas are still the other person’s, and failure to give credit
constitutes misrepresentation of the student’s actual work and plagiarism of
another’s ideas. Buying a paper or using information from the World Wide Web
or Internet without attribution and handing it in as one’s own work is plagiarism.
iii. Falsifying records or providing misinformation regarding one’s credentials.
iv. Unauthorized collaboration on computer assignments and unauthorized
access to and use of computer programs, including modifying computer files
created by others and representing that work as one’s own.
v. Unless they specifically indicate otherwise, instructors expect individual, unaided
work on homework assignments, exams, lab reports and computer exercises, and
documentation of sources when used. If instructors assign a special project other
than or in addition to exams, such as a research paper, or original essay or a book
review, they intend that work to be completed for that course only. Students must
not submit work completed for a course taken in the past or for a concurrent
course unless they have explicit permission to do so from both faculty members.
Any academic misconduct will automatically result in a failing grade for the class
and the student will be reported to the committee on academic misconduct for
further disciplinary action.
4. Attendance: As far as I am concerned, you are an adult and it is your decision whether or
not you attend class. However, your decision not to attend a class may have negative
consequences for your class grade. (Please consult PGP Participants’ Handbook for this
purpose).
If you decide to attend a class, you must come to the class and take your seat sufficiently
before the beginning of the class time. Under no circumstances you would be allowed in
once the class has started. You are expected to sit through the class unless you have a
prior permission from the instructor to leave the classroom before the end of the class.
5. Late submission: Any late submission beyond the deadline (even by few seconds)
will result in 0 point. Except in case of emergencies, with a doctor's note, any
questions about late submission will not be entertained.
6. Missed exam: There is no make-up for the missed exams unless the student has
discussed and made an arrangement with the instructor for a valid reason beforehand. In
all other instances, the student must produce a valid doctor's note for the day the student
missed the exam. Such doctor's note must be produced in the same week the student
missed the exam.
7. Grade Discussion: It is the student’s responsibility to monitor his or her own grades and
raise any questions s/he may have within one week of the grades assigned.
8. Extra Credit: No Extra credit shall be given to make-up for missed quizzes,
assignments, exams, project, or poor performance in the course.
Learning Accommodations
To provide equal access to the educational programs and opportunities, IIM Kashipur is dedicated to
providing appropriate accommodations to students with documented disabilities such as attention deficit-
hyperactivity disorders, physical disabilities, sensory impairments, and psychiatric disorders in order to
help them achieve their academic and personal potential. These academic accommodations are provided
to students at no cost.
Inclusivity Statement
IIM Kashipur believes that diversity and inclusiveness are essential to excellence in education and
innovation. Our community represents a rich variety of backgrounds, experiences, demographics, and
perspectives. IIM Kashipur is committed to fostering a learning environment where every individual is
respected and engaged. To facilitate a dynamic and inclusive educational experience, we ask all members
of our community to:
• be open to the perspectives of others
• appreciate the uniqueness of their colleagues
• take advantage of the opportunities to learn from each other
• exchange experiences, values, and beliefs
• communicate in a respectful manner
• be aware of the individuals who are marginalized and involve them
• keep confidential discussions private
