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FM202: Analysis and Management of Financial Risk



Course Content

This course helps to develop the relevant knowledge and understanding of risk management practices for students aiming to advance their careers in financial risk management.

The course is roughly divided in to four parts:

We start with an introduction to the classification of risk and the basic principles of diversification and hedging, optimal portfolio choice. This will include an overview of the Capital Asset Pricing Model, which is widely applied for the equilibrium pricing of risks.

Then, we will discuss the methods to manage market risk for fixed income and equity portfolios. You will learn about Value at Risk (VaR) and its applications to risk management practices.

Next, we introduce the concept of endogenous risks to demonstrate how financial risks originate within the financial system. We will also highlight behavioural aspects of risk and discuss important limitations of current risk management practices.

Finally, we turn to credit risk, with a focus on ratings based and structural models. We also cover credit risk on portfolios and credit derivatives. In the final lecture we will discuss the recent credit crisis and the ensuing regulatory responses and tie together the various parts of the course.

Topics covered include:

  • Foundations of risk measurement and risk finance theory.
  • Basic risk management instruments: Forwards, futures, swaps and options.
  • Market risk management: Methods for hedging risk in equity and fixed income portfolios; Delta and Gamma, Duration and Convexity.
  • Value-at-Risk: Definition, implementation and evaluation of risk forecasts. Alternative risk measures.
  • Credit risk: Merton model, the KMV approach, and ratings based models.
  • Introduction to credit derivatives and mortgage-backed securities.
  • Limitations and failures of risk models.
  • Endogenous risk.
  • Some ideas from behavioural finance: noise trader risk, limits to arbitrage, bubbles.
  • The impact of the credit crisis and its implications for risk management and regulation.

Course Outcomes

The objective of the course is to provide a conceptual framework for thinking about financial risk, covering both theoretical background and practical implementation. In particular, five out of twelve classes will be held in the computer lab in order to demonstrate how the material taught in the course can be used in practice.

Upon completion of the course, students will

  •  Have learned the main tools and practices needed to assess and evaluate financial risks.
  •  Understand risk management practices in an industry setting.
  •  Gain the ability to critically assess risk management reports and research. 

World-class LSE teaching

The LSE’s Department of Finance has grown in recent years to become one of the largest and most highly-regarded finance groups in the UK and Europe. On this three week intensive programme, you will engage with and learn from full-time lecturers from the LSE’s finance faculty. FM202 course lecturers, Dr Georgy Chabakauri and Dr Philippe Mueller teach on a number of our undergraduate and graduate Finance modules, including Finance, Risk Management for Financial Institutions and Quantitative Methods for Finance and Risk Analysis.


J. Hull, Risk Management and Financial Institutions (4th Edition), Wiley, 2015.

*A more detailed reading list will be supplied prior to the start of the programme

**Course content, faculty and dates may be subject to change without prior notice



Session: Two

Dates: 10 - 28 July 2017

Dr Georgy Chabakauri    
Dr Philippe Mueller 

Level: 200 level

Fees: Click here for information

Prerequisites: Basic mathematics and statistics

Lectures: 36 hours 

Classes: 18 hours

Assessment*: Two written examinations

Typical credit**: 3-4 credits (US)
7.5 ECTS points (EU)

How to apply?

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*assessment is optional – see FAQs

**You will need to check with your home institution. Read more about credit transfer here.