Financial Risk Management

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Financial Risk Management

• Course Syllabus

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Personal Information

• Instructor Name Ming-Yuan Leon Li
• Instructor Tel Ext 53421
• E-mail lmyleon_at_mail.ncku.edu.tw
• Office Hours
• Wednesday 1000-1200 AM
• Office Number 63315

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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

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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?

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Grading

• 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)

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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

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Textbook

• Chris Marrison, Fundamental of Risk Measurement
• Book store ????
• Mr. ?, 0936-968488
• TEL [phone]

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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)

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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

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Slides

• The slides in PowerPoint file
• How to find them
• My personal web-site
• http//140.116.51.3/chinese/faculty/mingyuan/myweb
  11/index.htm
• Some suggestions
• Download them and study them before the class

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(No Transcript)
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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

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Some Important Perspectives Review

• Two Examples
• The daily return rates of U.S. SP 500 stock
  index
• The daily return rates of Taiwan company Acer
  2353

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Use 2-yea data (near 500 daily return rates data)
to simulate the underlying distribution of return
rates of our portfolio Rt, for t1 to 500
Assume the return rate in the next trading day is
drawn from the same distribution Rt, for
t501,502,
If we assume the return rate follows the normal
distribution, then the potential loss can be
presented by standard error
Standard error, s
Standard error, s
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(1)If we assume the return rate follows the
normal distribution, then the potential loss can
be presented by standard error (2) The P return
ratelt-2.33Xs1 The P return
ratelt-1.96Xs2.5 The P return
ratelt-1.645Xs5 (3) If we assume the initial
investment money is 100,000, the loss of
gt100,000X 2.33Xs in the next day will have 1
probability of occurrences
Standard error, s (0.94)
Standard error, s
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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

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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

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More Discussions

• One asset versus Portfolio?
• Variance and covariance/correlation
• Risk contribution?
• stock 100 units, bond 50 units
• Q a portfoliostock bond 150 units?
• Normal distribution?
• Other types of risk?

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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

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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

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Floating rate vs. Fixed rate interest rate risk
Market Risk
Credit Risk
Long-term vs. short-term Liquidity Risk