BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani

K.K. BIRLA Goa Campus

INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

17/08/2020
In addition to part-I (General Handout for all courses appended to the timetable) this portion gives
further specific details regarding the course

Course No. : FIN F414

Course Title : FINANCIAL RISK ANALYTICS & MANAGEMENT
Instructor-in-Charge : Aswini Kumar Mishra
Instructors : A K Mishra, Ritika Jaiswal & Debasis Patnaik
Graduate Teaching Assistant: Manogna R L

1. Course Description:
Risk management; like most tend to believe is not only about numbers and measure of those numbers; it
is the ability to put the numbers in context of an Individual or of the firm’s appetite to take risk. The
objective of this course is to provide mathematical tools and underlying foundations for thinking about
measuring risk. It will lay the ground work for a systematic framework to think about risk. The course will
focus on mathematical foundations of risk management, provides an overview of products and foundations
required for pricing and valuation of the products, introduce various technique of quantifying market and
credit risk, provide a view of the regulatory landscape as it relates to risk and a practical view of risk
management from an trader and from an individual standpoint. This course has been designed to meet
industry requirements. Hence, concepts, mathematical/statistical models and simulation exercise will be
applied in real life business cases.

2. Scope and objective of the course:

Financial risk analytics course is designed to meet the growing industry need (Banking, Financial Services
and Insurance –BFSI), to address the challenges associated with financial risk (market risk, credit risk and
operation risk) through quantitative models, statistical methods and numerical algorithms. The course also
provides required information to understand and appreciate the regulatory framework and compliance for
reducing risk. In addition to that, the course highlights various risk management mechanisms that financial
institutions can follow for reducing the compliance risk. This course should be considered as an advanced
course and the students are expected to have general understanding of risk, return and pricing of financial
assets and derivatives. The typical job market roles after pursing this course are namely; risk modeling
expert, credit risk analyst and/ or quantitative risk analyst.

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 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani
K.K. BIRLA Goa Campus
INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

3. Text Book (TB):

T1). John C. Hull (2018). Risk Management & Financial Institutions, John Wiley & Sons; 5th edition.
Reference Books:

R1) Peter F. Christofferson (2012). Elements of Financial Risk Management. 2nd edition, Academic Press;
(an imprint of Elsevier).
R2) Michel Crouhy, Dan Galai and Robert Mark (2014). The Essentials of Risk Management, 2nd edition,
McGraw-Hill Education.

4. Course Plan:
Lecture Topics to Reference Instructor
Learning Objectives
No. be covered (Book)

Chapter 1- AKM
1-2 Financial Risk Management- An Overview Introduction T1, R1 &
R2

Mutual Funds; Exchange-Traded Funds; Mutual RJ

Active vs. Passive Management; Regulation; Funds, ETFs, Chapter 4-
3-4 and Hedge T1
Hedge Funds; Hedge Fund Strategies;
Funds
Hedge Fund Performance
The Markets; Clearing Houses; Long and
Trading in
SELF Short Positions in Assets; Derivatives Chapter 5-
Financial
STUDY Markets; Plain Vanilla Derivatives; Non- T1
Markets
Traditional Derivatives
Trading in RJ
Exotic Options and Structured Products; Chapter 5-
5 Financial
Risk Management Challenges T1
Markets

The U.S. Housing Market; Securitization; The Credit

SELF Chapter 6-
The Losses; What Went Wrong? Lessons Crisis of
STUDY T1
2007
from the Crisis
Volatility and Asset Prices; Risk-Neutral Valuation RJ
Chapter 7-
6-8 Valuation; Scenario Analysis; When Both and Scenario
T1
Analysis
Worlds Have to Be Used; The Calculations

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 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani
K.K. BIRLA Goa Campus
INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

in Practice; Estimating Real-World

Processes
Delta; Gamma; Vega; Theta; Rho; RJ
How Traders
Calculating Greek Letters; Taylor Series Chapter 8-
9-12 Manage
Expansions; The Realities of Hedging; T1
Their Risks
Hedging Exotic Options; Scenario Analysis
TEST 1=15 MARKS (September 16, RJ
Wednesday)
A Brief AKM
Review of
Probability Distributions and Moments; The Time Series
Chapter 3-
13-14 Linear Model; Univariate Time Series Analysis for
R1
Financial
Models; Multivariate Time Series Models
Risk
Management

SELF Volatility Chapter

Definition of Volatility; Implied Volatilities Modeling 10-T1
STUDY
Are Daily Percentage Changes in Financial AKM
Variables Normal? The Power Law;
Monitoring Daily Volatility; The Chapter
Volatility 10-T1
Exponentially Weighted Moving Average
15-18 Modeling
Model; The GARCH (1,1) Model; Choosing Chapter 4-
Between the Models; Maximum Likelihood R1

Methods; Using GARCH (1,1) to Forecast

Future Volatility
Definition of Correlation; Monitoring AKM
Covariance Chapter
Correlation; Correlation and Covariance 11-T1
and
19-22 Matrices; Multivariate Normal Correlation Chapter 7-
Distributions; Copulas; Application to Loan Models R1
Portfolios: Vasicek’s Model
SELF Definition of VaR; Examples of the Value-at- Chapter
STUDY Calculation of VaR; A Drawback of VaR Risk, and 12-T1

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 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani
K.K. BIRLA Goa Campus
INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

Expected
Shortfall

Expected Shortfall; Coherent Risk AKM

Value-at- Chapter
Measures; Choice of Parameters for VaR 12-T1
Risk, and
23-24 and ES; Marginal, Incremental, and Expected Chapter 6-
Component Measures; Euler’s Theorem; Shortfall R1
Aggregating VaRs and ESs; Back-Testing
TEST 2=15 MARKS (October 19, AKM
Monday)
Historical Chapter AKM
The Methodology; Accuracy of VaR; Simulation 13-T1
25-28 Extensions; Computational Issues; Extreme and Extreme
Value Chapter 6-
Value Theory; Applications of EVT R1
Theory

The concept of risk attribution; concept of Risk AKM

29-30 Class Note
diversification and measurement Attribution

Credit Ratings; Historical Default

Chapter
SELF Probabilities; Recovery Rates; Credit 19-T1
Credit Risk
STUDY Default Swaps; Credit Spreads; Estimating
Default Probabilities from Credit Spreads
Chapter AKM
Comparison of Default Probability 19-T1
31 Estimates; Using Equity Prices to Estimate Credit Risk
Chapter
Default Probabilities 12-R1

Scenario Chapter AKM

Generating the Scenarios; Regulation; What Analysis and 22-T1
32-33 Stress
to Do with the Results Chapter
Testing 13-R1

TEST 3=10 MARKS (November 11, AKM

Wednesday)
Defining Operational Risk; Categorization Operational Chapter DP
34-35 Risk 23-T1
of Operational Risks; Regulatory Capital

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 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani
K.K. BIRLA Goa Campus
INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

Under Basel II; The Standardized

Measurement Approach; Preventing
Operational Risk Losses; Allocation of
Operational Risk Capital; Use of Power
Law; Insurance; Sarbanes–Oxley
Liquidity Trading Risk; Liquidity Funding Liquidity Chapter DP
36 Risk 24-T1
Risk; Liquidity Black Holes
Enterprise DP
Risk Appetite; Risk Culture; Identifying Chapter
37-38 Risk
Major Risks; Strategic Risk Management 27-T1
Management

MINI TEST/QUIZ=10 MARKS DP

(November 25, Wednesday)
Behavioral AKM
39 Conclusion Finance & Class Note
Risk

5. Evaluation Scheme:
Sl. Evaluation Duration Weightage Date, Time & Venue Nature of
No. Component (%) Component
1 Test 1 30-45 Min. 15 September 16 (Wed) (During Online Test
scheduled class hour)

2 Test 2 30-45 Min. 15 October 19 (Mon) (During Online Test

scheduled class hour)

3 Test 3 30-45 Min. 10 November 11 (Wed) (During Online Test

scheduled class hour)

4 Mini Test/Quiz 30-45 Min. 10 November 25 (Wed) (During Online Test

scheduled class hour)

5 Individual/Group 20 November 20 (Fri) To be

Assignment announced later

6 Comprehensive 2 Hours 30 December 4 (Fri) (AN) Closed Book

Examination

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 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani
K.K. BIRLA Goa Campus
INSTRUCTION DIVISION
FIRST SEMESTER 2020-21
Course Handout (Part II)

6. Chamber Consultation hours: Prior appointment through email only

7. Notices: Notices would be displayed on DEPARTMENT OF ECONOMICS Notice Board
8. Make-up: Make-up may be given only on genuine grounds. Prior permission has to be obtained.
9. Other Course Policy Issues:
• Course Class Coverage and details of specific topics from the chapter will be announced in the class
from time to time.
• Assignment/Problem Sheets and Reading Assignments will be assigned periodically. They must be
worked out to understand the subject. For Reading Assignments, students are expected to consult the
books as advised in the classroom.
• No makeup examination will be given for class tests and quizzes.
• Students are expected to attend class and to arrive on time and prepared. You should read the sections
in the textbook we are going to cover in class prior to following the lecture.
• If there are problems of any nature that concern the class of which I am unaware of and which need to
be addressed, please feel free to discuss this with me at any time. The main objective is to foster an
environment where people who are interested in the subject matter have the opportunity to discuss
their questions in a positive learning environment.

The instructor reserves the right to make adjustments to this syllabus. Any change will be notified
at least one week in advance. But it is your responsibility to stay informed if you do not attend all
the classes.
Instructor-in-Charge
FIN F414

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