AFIN328
D2 2012
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Disclaimer
Macquarie University has taken all reasonable measures to ensure the information in this publication is accurate and up-to-date. However, the information may change or become out-dated as a result of change in University policies, procedures or rules. The University reserves the right to make changes to any information in this publication without notice.
Users of this publication are advised to check the website version of this publication [or the relevant faculty or department] before acting on any information in this publication.
http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 1

Unit guide AFIN328 Financial Risk Management
Unit convenor and teaching staff
Lecturer
James McCulloch james.mcculloch@mq.edu.au
Contact via james.mcculloch@mq.edu.au
Consultation during tutorials or via email
Unit Convenor
Alan Rai alan.rai@mq.edu.au
Contact via alan.rai@mq.edu.au
E4A 228
12.30-2.30pm Monday
Credit points
3
Prerequisites
ACCG252 or AFIN252
Corequisites
Co-badged status
Unit description
The aim of this unit is to prepare students for analytical duties a graduate is expected to carry out in a financial institution, or for research for a higher degree. On completing the unit, successful students also attain practical knowledge of how to apply and evaluate the quantitative methods covered in the unit in analysing and managing portfolios as well as the risk arising from various financial investments. In particular, students are expected to be able to: examine and find optimal investments strategies with respect to risk and return; attain an excellent knowledge of the role and characteristics of international financial markets and institutions; understand the pricing of various financial products and how they can be used for hedging; evaluate econometric models for financial variables; and acquire an extensive knowledge on the major approaches to managing market, credit and operational risks. By undertaking this unit, students have an opportunity to consolidate and extend the knowledge they attained in the first and second year finance units. Students are introduced to advanced techniques in financial markets and risk management practices with plenty of opportunities to apply them to real world data through several tutorial tasks and a written assignment.
http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 2

Unit guide AFIN328 Financial Risk Management
1. Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
2. Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
3. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
4. Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
5. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Name Weighting Due
Class Test 1
Class Test 2
Group assignment
Final Examination
10%
10%
25%
55%
Week 4
Week 10
Week12
University Examination Period
Due: Week 4
Weighting: 10%
Submission
In the lecture time
Extension
No extensions will be granted. Students who do not sit the test during the lecture time will be awarded a mark of 0 for the task, except for cases in which an application for special consideration is made and approved.
This Assessment Task relates to the following Learning Outcomes: http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 3

Unit guide AFIN328 Financial Risk Management
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
Due: Week 10
Weighting: 10%
Submission
In the lecture time.
Extension
No extensions will be granted. Students who do not sit the test during the lecture time will be awarded a mark of 0 for the task, except for cases in which an application for special consideration is made and approved.
This Assessment Task relates to the following Learning Outcomes:
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 4

Unit guide AFIN328 Financial Risk Management
Due: Week12
Weighting: 25%
Submission
In the lecture time
Extension
No extensions will be granted. Students who do not complete the assignment by the due date will be awarded a mark of 0 for the task, except for cases in which an application for special consideration is made and approved.
This Assessment Task relates to the following Learning Outcomes:
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Due: University Examination Period
Weighting: 55%
Examination conditions
What is required to complete the unit satisfactorily
This Assessment Task relates to the following Learning Outcomes:
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 5

Unit guide AFIN328 Financial Risk Management
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Classes
Classes in AFIN328 are composed of a three hour lecture. Unit materials are learnt by attending lectures and through independent learning. The lectures provide a general overview of the topics highlighting a number of concepts and techniques. Further additional reading material will be provided. Students are strongly advised to study the additional reading material provided by the unit convenor and the lecturers and further explore all relevant concepts and techniques. The timetable for classes can be found on the University web site http://www.timetables.mq.edu.au/
Required Text :
Hull, J. (2010) Risk Management and Financial Institutions, 2nd Edition, International Edition, Pearson. ISBN:
978-0-13-800617-4.
This book can be purchased from the Macquarie University Co-op Bookshop.
We will supplement the text with readings from journals and other textbooks as required.
Students needing assistance with mathematics should first consult:
Dowling, E.T. (1992) Introduction to Mathematical Economics, (2 nd Ed) New York: McGraw-Hill
Gujarati, D. (2003) Basic Econometrics, (4 th Ed), McGraw-Hill
Technology Used and Required
A scientific or business calculator without alphanumeric capabilities, internet access, computer with MS
Excel, and DerivaGem software available on the CD obtained by purchasing the required textbook.
Teaching and Learning Strategy
• The teaching strategy in AFIN328 recognises that students learn independently and assume responsibility for the learning process and with academic integrity.
• Students are expected to participate in the unit by attending lectures, reading the provided material, thoroughly revising the lecture notes and preparing answers to the provided exercise questions and reading additional material about important issues in investment and risk.
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Unit guide AFIN328 Financial Risk Management
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Week Topics
1 Hull Chapter 1,2& 5 : Introduction, Risk and Return, Portfolio Construction,
Banks, Financial Instruments
Hull Chapter6: How Traders Manage Their Exposure
Hull Chapter7: Interest Rate Risk, Duration, Convexity
1st Semester/Hull Chapter8: Value-at-Risk
Hull Chapter9: Volatility, EWMA and GARCH models
Hull Chapter10: Correlations and Copulas
Hull Chapter11: Regulation, Basel II, WCDR
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Hull Chapter12&13: Market Risk VaR: Historical Simulation and Model Building
Approach
Hull Chapter 14&15: Credit Risk-Probabilities of Default (PD), Credit VaR
2nd Semester Test/Hull Chapter16: Credit Derivatives and the Credit Crunch of 2007
Hull Chapter 17&18: Stress Testing and Operational Risk
Hull Chapter 21: Economic Capital and RAROC
Revision Lecture
Macquarie University policies and procedures are accessible from Policy Central . Students should be aware of the following policies in particular with regard to Learning and Teaching:
Academic Honesty Policy http://www.mq.edu.au/policy/docs/academic_honesty/policy.html
Assessment Policy http://www.mq.edu.au/policy/docs/assessment/policy.html
Grade Appeal Policy http://www.mq.edu.au/policy/docs/gradeappeal/policy.html
Special Consideration Policy http://www.mq.edu.au/policy/docs/special_consideration/policy.html
In addition, a number of other policies can be found in the Learning and Teaching Category of
Policy Central.
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Unit guide AFIN328 Financial Risk Management
Macquarie University provides a range of Academic Student Support Services. Details of these services can be accessed at: http://students.mq.edu.au/support/ .
UniWISE provides:
• Online learning resources and academic skills workshops http://www.mq.edu.au/ learning_skills/
• Personal assistance with your learning & study related questions.
• The Learning Help Desk is located in the Library foyer (level 2).
• Online and on-campus orientation events run by Mentors@Macquarie.
Details of these services can be accessed at http://www.student.mq.edu.au/ses/ .
Students with a disability are encouraged to contact the Disability Support Unit who can provide appropriate help with any issues that arise during their studies.
If you wish to receive IT help, we would be glad to assist you at http://informatics.mq.edu.au/ help/ .
When using the university's IT, you must adhere to the Acceptable Use Policy . The policy applies to all who connect to the MQ network including students and it outlines what can be done.
Our graduates will also be capable of creative thinking and of creating knowledge. They will be imaginative and open to experience and capable of innovation at work and in the community. We want them to be engaged in applying their critical, creative thinking.
This graduate capability is supported by:
Learning outcomes
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 8

Unit guide AFIN328 Financial Risk Management
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Assessment task
• Final Examination
Our graduates will have enquiring minds and a literate curiosity which will lead them to pursue knowledge for its own sake. They will continue to pursue learning in their careers and as they participate in the world. They will be capable of reflecting on their experiences and relationships with others and the environment, learning from them, and growing - personally, professionally and socially.
This graduate capability is supported by:
Learning outcomes
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Assessment task
• Final Examination
Our graduates should be capable of researching; of analysing, and interpreting and assessing data and information in various forms; of drawing connections across fields of knowledge; and they should be able to relate their knowledge to complex situations at work or in the world, in order to diagnose and solve problems. We want them to have the confidence to take the initiative in doing so, within an awareness of their own limitations.
This graduate capability is supported by: http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 9

Unit guide AFIN328 Financial Risk Management
Learning outcomes
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Assessment tasks
• Class Test 1
• Class Test 2
• Group assignment
• Final Examination
We want to develop in our students the ability to communicate and convey their views in forms effective with different audiences. We want our graduates to take with them the capability to read, listen, question, gather and evaluate information resources in a variety of formats, assess, write clearly, speak effectively, and to use visual communication and communication technologies as appropriate.
This graduate capability is supported by:
Learning outcomes
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
Assessment tasks
• Group assignment
• Final Examination http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 10

Unit guide AFIN328 Financial Risk Management
Our graduates will take with them the intellectual development, depth and breadth of knowledge, scholarly understanding, and specific subject content in their chosen fields to make them competent and confident in their subject or profession. They will be able to demonstrate, where relevant, professional technical competence and meet professional standards. They will be able to articulate the structure of knowledge of their discipline, be able to adapt discipline-specific knowledge to novel situations, and be able to contribute from their discipline to inter-disciplinary solutions to problems.
This graduate capability is supported by:
Learning outcomes
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Assessment tasks
• Class Test 1
• Class Test 2
• Group assignment
• Final Examination
We want our graduates to be capable of reasoning, questioning and analysing, and to integrate and synthesise learning and knowledge from a range of sources and environments; to be able to critique constraints, assumptions and limitations; to be able to think independently and systemically in relation to scholarly activity, in the workplace, and in the world. We want them to have a level of scientific and information technology literacy.
This graduate capability is supported by: http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 11

Unit guide AFIN328 Financial Risk Management
Learning outcomes
• Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments.
• Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries.
• Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging.
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
• Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel
Capital Accord.
Assessment tasks
• Class Test 1
• Class Test 2
• Group assignment
• Final Examination
As local citizens our graduates will be aware of indigenous perspectives and of the nation's historical context. They will be engaged with the challenges of contemporary society and with knowledge and ideas. We want our graduates to have respect for diversity, to be open-minded, sensitive to others and inclusive, and to be open to other cultures and perspectives: they should have a level of cultural literacy. Our graduates should be aware of disadvantage and social justice, and be willing to participate to help create a wiser and better society.
This graduate capability is supported by:
Assessment task
• Group assignment
We want our graduates to have emotional intelligence and sound interpersonal skills and to demonstrate discernment and common sense in their professional and personal judgement.
They will exercise initiative as needed. They will be capable of risk assessment, and be able to handle ambiguity and complexity, enabling them to be adaptable in diverse and changing environments.
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Unit guide AFIN328 Financial Risk Management
This graduate capability is supported by:
Learning outcome
• Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties.
Assessment tasks
• Class Test 1
• Class Test 2
• Final Examination
• This unit gives you practice in applying research findings in your assignments
• This unit gives you opportunities to conduct your own research http://unitguides.mq.edu.au/unit_offerings/11842/unit_guide/print 13