FM409      Half Unit
Risk Management in Financial Markets

This information is for the 2025/26 session.

Course Convenor

Availability

Requisites

Co-requisites:

Either before taking this course, or in the same year as this course, students must complete:

FM436

or

((FM422 or FM422E) and (FM423 or FM423E))

On the micro side:
•    Hedging in equity and fixed income markets
•    Risk measures for funds, banks and non-banks (such as mutual funds, hedge funds, pension funds, insurers, etc.) and the impacts of micro- and macroprudential regulatory constraints on risk management
•    Asset-liability management, liquidity management, risk sizing/capital allocation.
•    Limits to Arbitrage (sometimes what seems like a profitable risk-free trade that justifies high leverage may in fact be risky)
•    Credit risk and structured products

On the macro side:
•    We study Endogenous Risks (amplification mechanisms, feedback loops, domino effects, cross-market effects and correlation switches and the, sometimes unexpected, impacts of hedging and regulations back on market risk) arising from investment strategies such as carry and basis trades, ALM management, volatility trades, risk parity strategies, and from the risk/regulatory constraints themselves.
•    Financial and land cycles
•    New risks arising from information technologies, including cyber, AI, algorithmic trading
 

The aim of this course is to offer an introduction to the analysis and management of risk within financial markets. The course develops a conceptual framework for thinking about financial risk and shows how these concepts are implemented in practice in a variety of contexts. First, the course offers an overview of risk management in the context of portfolios of fixed income securities and derivatives, including bank, insurance and pension balance sheets. Next, we discuss the implementation and the merits of the most common micro risk measures. In the context of credit risk we will cover ratings based and structural models, as well as credit risk on portfolios and credit derivatives. 

On the macro side, we will cover endogenous risk and limits to arbitrage in depth, and learn how to think holistically about risk, including second and further round effects, including those affecting other markets. This opens up the questions of macro-prudential and systemic regulations, and we plan to invite a Bank of England executive to speak on how they try to capture amplifications within markets and across markets. Systemic financial risks follow cycles and we cover the main signs to look out for, and study whether macro-prudential rules can mitigate them. New risks arise from new technologies, and we’ll explore possible avenues for risks to unfold and how to think about them. 

All of these risks listed above may appear to be distinct and unrelated, but this course offers an elegant coherent way to think about them holistically. Throughout, the course spends a significant amount of time on practical applications of the theories that are introduced. Whatever professional roles you see yourselves in, a proper risk culture and the understanding, managing, mitigating and profiting from risk will set you apart from others. The understanding and proper management of risk create opportunities, value and profit.
 

30 hours of lectures in the Winter Term.

This course is taught in the interactive lecturing format. There is no distinction between lectures and classes/seminars; there are “sessions” only, and the pedagogical approach in each session is interactive.

Problem sets. In addition, students will have the opportunity to present the results of a case study to the class.

Course readings will vary from year to year depending upon the topics covered.

Continuous assessment (100%)