Financial Risk Management
Course Syllabus
Personal Information
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Instructor Name: Ming-Yuan Leon Li
Instructor Tel: Ext 53421
E-mail: lmyleon@mail.ncku.edu.tw
Office Hours:
– Wednesday: 10:00-12:00 AM
• Office Number: 63315
Course Descriptions/Objectives
• Help students to better understand the topic
relating to “financial risk management” by
textbook studying and extra handouts.
• The goals of this course are the following ：
– Provide quick access to the whys and how of risk
management
– Provide easy-to-understand information, including
equations and examples that can be quickly applied
to most risk management problems.
– Provide information about how risk measurement is
used in the management of risk and profitability
Course Descriptions/Objectives
• After studying the course , you should be
able to answer the following four questions：
– How much could we lose ？
– Can we absorb a significant loss without
going bankrupt？
– Is the return high enough for us to take risk？
– How can we reduce the risk without
significantly reducing the return？
Grading
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1st Exam (25%): held in the 7th week
2nd Exam (25%): held in the 13th week
3rd Exam (30%): held in the 18th week
Class participation (20%)
Grading
– Class participation
• Homework
–Writing report and/or oral report
• Quick Quiz
–In the ending of each chapter, I will
provide a quick quiz including several
simple questions to review today's
content
–Your performance will be evaluated into
your score
Textbook
• Chris Marrison, Fundamental of Risk
Measurement
– Book store: 新陸書局
– Mr. 江, 0936-968488
– TEL: 02-2381-9277
Course Calendar/Schedule
• Before 1st Exam:
– The Basic of Risk Management (Ch 1 to Ch 2)
– Market Risk Management (Ch 5 to Ch 8)
• Between 1st and 2nd Exam:
– Market Risk Management (Ch 9 to Ch 11)
– Asset Liability Risk Management (Ch 12 to Ch 13)
• After 2nd Exam:
– Asset Liability Risk Management (Ch 13 to Ch 15)
– Credit Risk Management (Ch 15 to Ch 19)
Course Policies
• The purpose of this class is to identify the hidden
agenda in this subject
• I will follow the textbook to present the important
topics of risk management, especially for banks
• It is expected that every student attend all
classes and take all examinations when
scheduled
• In order to maximize your learning and to
receive credit for your classes, you must attend
at least 80% of classes
Slides
• The slides in PowerPoint file
• How to find them
– My personal web-site
– http://140.116.51.3/chinese/faculty/mingyuan/
myweb11/index.htm
• Some suggestions
– Download them and study them before the
class
Certain Important Perspectives
Review
• What is the risk?
– A potential loss in the future
• How to measure the risk
– Use the historical data to simulate the distribution of
return rate of your portfolio
– For example, 2-year data to picture the distribution
curve
– Assume the return rate in the next trading day will be
drawn from the same distribution
• How to picture the distribution?
– Mean and Standard errors
– Correlation coefficients
Some Important Perspectives
Review
• Two Examples
– The daily return rates of U.S. S&P 500 stock
index
– The daily return rates of Taiwan company:
Acer 2353
Distribution of Return Rate for U.S. Market
0.35
Use 2-yea data (near 500
daily return rates data) to
simulate the underlying
distribution of return rates
of our portfolio
Assume the return
rate in the next
trading day is drawn
from the same
distribution
0.3
0.25
Rt, for t=1 to 500
Rt, for t=501,502, …
0.2
If we assume the return
rate follows the normal
distribution, then the
potential loss can be
presented by standard
error
0.15
Standard0.1
error, σ
Standard
error, σ
0.05
0
-4
-3
-2
-1
0
1
2
3
4
Distribution of Return Rate for U.S. Market
(1)If we assume the return rate
follows the normal distribution, then the potential
loss can be presented by standard error
0.35
(2) The P[ return rate<-2.33Xσ]=1%
The P[ return rate<-1.96Xσ]=2.5% 0.3
The P[ return rate<-1.645Xσ]=5%
0.25
(3) If we assume the initial investment money is 100,000, the loss
of ”>100,000X 2.33Xσ” in the next day0.2
will have 1% probability of occurrences
0.15
Standard0.1
error, σ
Standard
error, σ
(0.94%)
0.05
0
-4
-3
-2
-1
0
1
2
3
4
Homework (1)
• Please pick up one company
• Figure the distributions of their daily stock price
returns
• One-year daily data at least
• Estimate its mean and standard error
• Assume the initial investment is 1 million dollars
(1,000,000)
• Calculate the potential 1% loss in the next day
Homework (1)
• Does the distribution follow a normal
distribution?
– Normalize the returns: (returns-mean)/SD
– The 1% critical value of the distribution vs.
2.33
More Discussions
• One asset versus Portfolio?
– Variance and covariance/correlation
– Risk contribution?
– stock: 100 units, bond: 50 units;
– Q: a portfolio=stock + bond: 150 units?
• Normal distribution?
• Other types of risk?
Structure of Financial Risk
Management
• Define the risk
– Market risk
– ALM risk
• ALM interest rate risk
• ALM liquidity risk
– Credit risk
• Measure the risk
– Use the historical data to picture the
distribution of the loss
Structure of Financial Risk
Management
• Manage the risk
– Reduce the risk
• Hedge
• Diversification
– Capital preparation
– Risk allocation
• Which unit takes the risk?
– Performance evaluation
• Risk-adjusted performance
Market Risk
Credit Risk
Floating rate vs. Fixed rate:
interest rate risk
Long-term vs. short-term: Liquidity Risk