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AF202: Analysis and Management of Financial Risk

Session: Two

Prerequisites: Basic mathematics and statistics

Dr Georgy Chabakauri
Dr Philippe Mueller

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 objective of the course is to provide a conceptual framework for thinking about financial risk, covering both theoretical background and practical implementation. 

The course starts with an introduction to the classification of risk and the basic principles of diversification and hedging, optimal portfolio choice, as well as the Capital Asset Pricing Model, widely applied for the equilibrium pricing of risks. Then we will discuss the methods to manage market risk for fixed income and equity portfolios. The students will learn about Value at Risk (VaR) and its applications to risk management practices. Furthermore, the course introduces the concept of endogenous risks and demonstrates how financial risks originate within the financial system. The course also highlights behavioural aspects of risk and discusses important limitations of current risk management practices.

Participants will become familiar with the main tools and practices needed to assess and evaluate financial risks, they will understand the risk management practices in an industry setting and will be able to critically assess risk management reports and research. 

The course will address the following key topics:

  • 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 on-going credit crisis, and implications for risk management and regulation.

The course format is a mixture of lectures and group discussions on the basis of case studies.


Main textbook
J. Hull, Risk Management and Financial Institutions (3rd Edition), Wiley, 2012.

Additional textbooks
Zvi Bodie, Alex Kane and Alan J. Marcus, Investments (9th edition), McGraw-Hill, 2011.
Michel Crouhy, Dan Galai and Robert Mark, Risk Management, McGraw-Hill, 2001.
Jon Danielsson, Financial Risk Forecasting, Wiley, 2011.

36 Hours    Classes: 12 Hours
Assessment: Two written examinations