The course examines modern techniques for managing financial risks. Financial risks are generally classified into market risks, due to movement in financial prices or volatilities, credit risks, due to fact that counterparties are unwilling or unable to fulfill their contractual obligations, liquidity risks, when transactions cannot be conducted at prevailing market prices, perhaps due to cash flow constraints, and operational risks, which arise from human or technical problems.
The course will cover measurement techniques for different types of financial risks (equity, fixed income, currency, commodity) and instruments. It will cover risk measurement and hedging tools such as duration, portfolio beta, value at risk (VAR). It will also discuss how risk measurement tools can be used for active management of the risk/return profile of financial institutions via derivative instruments.
Upon completion of this course, the successful student should able to:
- Understand the basics of the risk vs. return relationship
- Understand common derivative financial instruments
- Compute the values of forwards, futures, and swaps
- Understand common option strategies and application
- Compute the value of an option using the Binomial Option Pricing model
- Compute the value of an option using the Black-Scholes Pricing model
This is an intermediate course in finance. Students are expected to have a basic understanding of core financial concepts. Students who have not completed academic coursework in finance or do not have the requisite professional experience must complete Principles of Finance (XCPD-684) before enrolling in the course. Students without basic knowledge of financial concepts must receive permission from the instructor to enroll in the course.