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 | 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
HANDOUTSPractical 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 |