Study-Unit Description

Study-Unit Description


TITLE Risk Management

LEVEL 04 - Years 4, 5 in Modular UG or PG Cert Course


DEPARTMENT Banking and Finance

DESCRIPTION Risk management is the set of processes through which management identifies, analyzes, and, where necessary, responds appropriately to risks that might adversely affect realization of the organization's business objectives. The response to risks typically depends on their perceived gravity, and involves controlling, avoiding, accepting or transferring them to a third party. Whereas organizations routinely manage a wide range of risks (e.g. technological risks, commercial/financial risks, information security risks etc.), external legal and regulatory compliance risks are arguably the key issue in a Governance, risk management, and compliance (GRC) process.

Different investors and investor groups have different objectives and requirements, but all deserve the best return that risk can buy. Return is simple enough to measure, but at the same time dangerously luring if not seen in the context of risk. Risk, by contrast, is multifaceted and elusive.

Because portfolio risk is often hidden behind apparently quantifiable and orderly intermarket and interstrategy relationships (or nonrelationships), its true dimensions are easy to understate during nonstressed market periods.Underestimation of risk can lead to superb performance followed by sudden substantial losses. Overestimation of risk leads to inefficient utilization of available capital. Consequently, a highly methodical and multidimensional approach toward balancing the naturally interrelated investment companions “return”and “risk” is essential to successful investing.

This study-unit looks at the risk fundamentals in the context of the modern financial industry and corporate treasury, focusing mainly on Hedge Funds and Banks. The topics covered are intended to provide students with knowledge of how risk exposures are identified, understood, measured and managed within the Financial Services Industry. Students are exposed to widely accepted measures of risk such as Value-at-Risk and analytical and numerical methods used in the computation of risk measures. The content of the study-unit is a mix of quantitative and qualitative approaches, with all the required knowledge of mathematics, statistics and interpretation provided during the lectures.

Non-technical students will be guided through the content and a strong emphasis on practical aspects to risk management is maintained throughout. The coursework provided ensures that students grasp the practical side to risk measurement and management.

1. Introduction to Risk (Chapter 1 JH)
2. How Traders Manage Their Risks (Chapter 7 JH)
3. Components of Risk
    - Volatility (Chp 1 RH)
    - Diversification (Chp 2 RH)
    - Leverage (Chp 3 RH)
    - Illiquidity (Chp 4 RH)
4. Value at Risk (Chp 9, 14,15,18 JH)
5. Scenario Analysis and Stress Testing (Chp 19 JH)
6. Operational and Integrated Risk management (Chp 20, 23 JH)
7. Business Continuity Planning
8. Liquidity and Model Risk (Chp 21, 22 JH)
9. Risk Management Mistakes to Avoid (Chp 24 JH)

Non-technical students will be guided through the content and a strong emphasis on practical aspects to risk management is maintained throughout. The coursework provided ensures that students grasp the practical side to risk measurement and management.

Study-unit Aims:

Provide students with an understanding of the role of the risk manager and basic knowledge of the mechanics behind the measurement and the management of the major risks faced by financial institutions such as market and credit risks. Secure a good grounding in the theory of options pricing and the Greeks, and their use in the treasury environment. Understand the logic behind, and apply, numerical methods to problems arising in risk analysis. Introduce industry standard risk measurement concepts including Value-at-Risk and Conditional-VaR. Provide basic working knowledge behind the practical uses of volatility and correlation forecasting in the context of risk measurement and management. Understand the risks attached to the use of financial derivatives and raise awareness as to the risks attached to the use of models.

Learning Outcomes:

1. Knowledge & Understanding:
By the end of the study-unit the student will be able to:

- Demonstrate an understanding of the nature of the problem in risk measurement and management;
- Comprehend and describe the most popular methods applied to the problem of risk measurement;
- Derive major mathematical results from the literature and reproduce other results from the theory underlying risk management;
- Demonstrate an understanding of the benefits and limitations in managing risk and the underlying theoretical models and understand that risk management is an art as it is a science.

2. Skills:
By the end of the study-unit the student will be able to:

- Develop strategies to measuring and managing risk;
- Evaluate and compute risk measures both analytically and numerically;
- Implement and evaluate numerical procedures;
- Interpret measures of risk and apply them to the process of managing financial risk;
- Interpret and make use of the financial pages in the news in the context of risk management.

Main Text/s and any supplementary readings:

• Risk Management and Financial Institutions, (Wiley Finance) John Hull, ISBN: 978-1-118-26903-9.
• Strategic Risk Taking: A Framework for Risk Management Aswath Damodaran.

ADDITIONAL NOTES Pre-requisite Study-unit: Financial Markets

STUDY-UNIT TYPE Lecture and Tutorial

Assessment Component/s Assessment Due Resit Availability Weighting
Assignment SEM2 Yes 30%
Assignment SEM2 Yes 70%

LECTURER/S Simon Grima (Co-ord.)
Tyrone Mizzi

The University makes every effort to ensure that the published Courses Plans, Programmes of Study and Study-Unit information are complete and up-to-date at the time of publication. The University reserves the right to make changes in case errors are detected after publication.
The availability of optional units may be subject to timetabling constraints.
Units not attracting a sufficient number of registrations may be withdrawn without notice.
It should be noted that all the information in the description above applies to study-units available during the academic year 2020/1. It may be subject to change in subsequent years.