FE535 Introduction to Financial Risk Management


Course Catalog Description

Introduction

The course will review different topics related to risk modeling and management, specifically in line with Financial Risk Manager (FRM) Parts I and II (mainly Part I). The class will begin with basic topics related to Quantitative Analysis and Financial Market Products, covering derivatives and options. The first part of the class will be dedicated to Market Risk and how to use derivatives to manage risk. Later in the class, we will cover topics related to Credit Risk, which will relate to measuring default risk and managing credit risk. Additionally, the students will have the opportunity to apply their knowledge in two mini-projects over the semester. Past tutorials are available to further assist the students to meet their goals and equip them with the necessary tools needed to tackle real data risk management problems.


Campus Fall Spring Summer
On Campus X X
Web Campus X X

Instructors

Professor Email Office
Majeed Simaan msimaan@stevens.edu Babbio 629
Khaldoun Khashanah kkhashan@stevens.edu Babbio 543

More Information

Course Outcome

The objective of the course is to learn the main financial concepts and analytical tools in risk management. Lectures will be combined with discussions, in-class labs, and applied projects using real data and computations. As a result, the aim of the class is to help students to both think and act as professional risk managers. Additionally, the class aims to cover different topics from FRM Parts I and II, aiding the students to comprehend the exam materials from a deeper perspective.

After successful completion of this course, you will be able to:

  • Model risk using stochastic processes
  • Use statistical analysis of financial data for risk pricing and management
  • Understand different types of asset classes and derivatives
  • Identify different types of risk such as model, market, and credit
  • Apply derivatives for linear and non-linear risk management

Course Resources

Textbook

Financial Risk Manager Handbook, + Test Bank: FRM Part I / Part II 6th Edition by Philippe Jorion

Additional References

Risk Management and Financial Institutions (Wiley Finance) 4th Edition by John C. Hull

The Economic Foundations of Risk Management: Theory, Practice, and Applications by Robert A. Jarrow

The Essentials of Risk Management (McGraw-Hill) 2nd Edition by Michel Crouhy, Dan Galai , and Robert Mark

Risk Management and Simulation by Aparna Gupta

HANDOUTS

Practical Methods of Financial Engineering and Risk Management: Tools for Modern Financial Professionals by Rupak Chatterjee



Grading

Grading Policies

Type Weights Notes
Midterm 30% The midterm will be in the same fashion as the FRM exam. It will mainly include all chapters that we cover during the first half of the course.
Final Term 30% The final will be in the same fashion as the FRM exam. It will mainly include all chapters that we cover during the second half of the course.
Mini-Projects 20% There will be 2 mini-projects over the semester. Each submission counts as 10 points of the final grade. The projects will be completed and graded as a team. For each project, a presentation is required.
Presentation: upon submission, teams are expected to present their work and highlight individual contribution and synergy. Each presentation counts as 5 points and will be graded on the individual level.
Note: the assignments will require computation and working with data. I will provide handouts and tutorials on this. These will be mainly conducted using R. Nonetheless, teams are welcome to use any other programming language or statistical software. However, my contribution is limited to R.
Labs 10% We will have multiple labs during classes. The purpose of these is to encourage discussion among the team members and apply recently learned topics. The labs will require some computer computations. Hence, the students are encouraged to work with their laptops.
Participation 10% Discussions are highly encouraged, including class attendance and general participation. Additionally, attendance will be taken over the course of the semester.
The class will integrate DataCamp (DC) as part of the programming process. There will be multiple assignments over the semester that will count as part of your class participation.

Lecture Outline

Week Topic Reading Assignment
Week 1 Intro to Risk Management Ch. 1 from Jorion
Recommended: Ch.1 from Hull
Week 2 Portfolio Theory and CAPM Ch. 1 from Jorion
Recommended: Ch.1 from Hull		 Refresh your probability and statistics knowledge: read Ch. 2 and Ch 3 from Jorion
Week 3 Modeling and Simulation: Law of Large Numbers Ch. 4 from Jorion
Recommended: Ch. 7 from Hull
Week 4 Modeling and Simulation:Brownian Motion (BM) see above Lab 1 Due
Week 5 Calibration of Geometric BM and application to RM see above Lab 2 Due
Week 6 Introduction to Bonds, Time Value of Money Ch. 6 from Jorion Lab 3 Due
Week 7 Interest Rate Risk Case Study: LTCM
Project 1 Update
Lab 4 Due (no submission)
Week 8 Midterm Review Midterm Week
Week 9 Introduction to Derivatives Ch. 7 from Jorion
Recommended: Ch. 5 from Hull
For further information on the OTC market refer to Ch 18 from Hull		 Project 1 Due
Week 10 Introduction to Derivatives II see above
Week 11 Managing Linear Risk Ch. 13 from Jorion
Recommended: Ch.8 from Hull
Week 12 Managing Linear Risk II see above Project 2 Update
Week 13 Option Markets Ch. 8 from Jorion
Recommended: Ch.8 from Hull		 Lab 5 Due
Week 14 Managing Non-Linear Risk Ch. 14 from Jorion
Recommended: Ch.8 from Hull		 Lab 6
Week 15 Special Topic + Final Review Project 2 Due
Week 16 Exam II