FIRST SEMESTER 2021-22

Course Handout Part II

Date: 20-08-2021
In addition to part-I (General Handout for all courses appended to the time table) this portion gives further
specific details regarding the course.

Course No. : FIN F414

Course Title : FINANCIAL RISK ANALYTICS & MANAGEMENT
Instructor-in-Charge : Thota Nagaraju (nagaraju@hyderabad.bits-pilani.ac.in)

Scope and Objective of the Course:

Textbooks:
1. John C. Hull, Risk Management & Financial Institutions, 4th Edition, Wiley
2. Credit Suisse Material

Reference books
1) Phillipe Jorion (2007). Value at Risk, 3rd Edition: The New Benchmark for Managing Financial Risk John C Hull (2015). Options, Futures,
and Other Derivatives, 9th Edition
2) Michel Crouhy (2014). The Essentials of Risk Management, 2nd Edition. John C Hull (2012). Risk Management and Financial institutions,
3rd Edition.
3) Advanced Engineering Mathematics by Erwin Kreyszig, 10th Edition
4) A First Course in Probability by Sheldon Ross
5) Introductory econometrics for finance" by Chris Brooks 2nd Edition
6) Basic Econometrics, Damodar Gujarati , Dawn Porter , and Sangeetha Gunasekar, 5th edition.
Course Plan:
Topics to be Chapter in the Text
Lecture No. Learning objectives
covered Book
Module 1: PreparatoryThis module reviews the basic concepts of Limits and OLS,
Sessions (9 Sessions) Continuity; Differentiation (Chain, Product and Hetroscedasticity, R5: Ch3, 4, 5, 6, 7, 8,
Multicollinearity, 9
Quotient Rules); Integrals (Definite and Indefinite);Autocorrelation, R6: ch 5, 6 and 8
Sequences and series; Partial derivatives; Measures of AR, AM,
Central Tendencies and Dispersion; Skewness, ARIMA,
GARCH, and
Moments, Kurtosis; Random Variables (Discrete and VAR Models
continuous) Expectation and Joint Distribution;
Discrete probability distributions (Binomial, Poison
and Multinomial); Normal Distribution; Ordinary
Least Squares (Single & Multiple) & Maximum

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 Likelihood Estimation; Relaxing OLS assumptions
(Heteroskedasticity & Autocorrelation); Dummy and
Qualitative Response Variable (Logit and Probit); AR,
MA, ARIMA, VAR Models; ARCH, GARCH
Models; pricing of Forwards, Futures and Options.

Banks & Risk Management, Capital regulation of

bank, Value creation through risk management,
financial risk systems,
In this module, we will begin with the introduction
efficient and complete markets, which is the precursor
Module 2: Introductio pricing of financial instruments based on arbitrage and r
to Complete and neutral pricing. We begin with a market on coin toss R2, R3 and
No arbitrage
Credit Suisse
Efficient Markets demonstrate these concepts and drive home the theory pricing models
Material (1.1)
No. of Sessions: 3 arbitrage through the Arrow-Debreu securities. We the
move from coin tosses to actual financial instruments
forwards and options. We discuss the market efficien
and completeness to understand the no-arbitrage pric
and risk-neutral pricing.

This module deals with different financial markets a

their working to enable a better understanding of how
transactions are facilitated and also give a brief overvi
about different asset classes like Equities and FX. We w
Module 3: Overview
start with different financial markets like Capital mark
Financial Markets an Financial TB, R2, R3 and
which comprise of both Primary and Secondary marke Markets and Credit Suisse
Asset Classes Asset Classes Material (2)
Money Market, Cash or Spot market, Derivatives mark
No. of Sessions: 6
and finally Forex and Interbank markets. We will a
discuss about different asset classes, differences amon
asset classes and key features.

Module 4a: Options a In this module, we introduce a class of derivatives cal Options and
Greeks Options and risk measures associated with these opti Greeks
No. of Sessions: 3 called Greeks. We will start with definition and types
TB, R2 & R3)
Options and then move on to discuss the basic strateg
and payoffs. We will learn about different pricing theor
for options like Binomial Option pricing and then disc
about the Greeks and how they are utilized in r
management practices. We then cover about the trading
Greeks before we conclude this module with br
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 overview of basic exotic options.
Simulation
"Normal random number generation; Evolution of
spot using GBM; Finding the price of a bond;
Duration hedging and sensitivity calculation; Option
pricing using BSM, strike-price profile, option Simulation
Excel sheet will be
pricing using Monte-Carlo;Implied Volatility of an shared
option; Implied Volatility vs Realized Volatility;
Delta-hedging options"

Forex Risk Management

Module 4b: Forex Risk
(Interest rate parity. PPP, Fundamental analysis; (TB, R2 & R3)
Management FX risk Mgmt
translation, Economic exposure, transaction and
hedging strategies.)
This module starts with a brief introduction to Risk, a
highlights various types of risks like market risk, cred
risk, operational risk etc before going in detail of Mar
risk. We will also describe risk and return concep
measurement of various risks. We will introduce
most widely used industry standard called Value at R
(VaR). We will then dive into the details of types of V (TB, R1, R2 & R3)
Module 5: Introductionand compare it with alternate risk measures. We th
to Risk (Market, Credit,move on to the basics of Historical Simulation mod
Operation & Enterprise)underlying assumptions, various return calculat Value at Risk (VaR)
and Measures of Marketmethods and functions to capture the market risk. W Models

Risk will conclude this module by learning about t

Simulation
No. of Sessions: 3 Responsive VaR model, understanding the Exponen Excel sheet will be
Weighting and Expected Shortfall approaches. shared

Followed by simulation
Creating a hypothetical portfolio (FX, IR and EQ)
and running the simulations on their prices/yield in
terms of Parametric VaR; Historical Simulation
VaR and Monte Carlo VaR (1000 simulations)

Module 6: Advanced This module builds on from the VaR concepts introduc Advanced Value at TB, R2 & R3 and
VaR models Risk (VaR) Models Credit Suisse
in the earlier model and addresses the shortcomings
Material (3.2)
No. of Sessions: 6 the basic VaR model like the distributional assumptio
We then discuss about the gaps identified in VaR mod
in addressing the behaviour of market volatility call
Volatility Clustering. We will introduce the remed

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 approaches like EWMA, GARCH to address these g
and critically assess these methods from the practical a
implementation perspective. We will conclude t
module by studying about the Principal Compon
Analysis (PCA) which explains about the estimation
VaR when there are multiple risk factors that are hig
correlated.

In this module, we will introduce the concepts of Cred

risk and its modelling. We cover the aspects like Cre
Default risk, Counterparty credit risk and concentrat
risk before we move on to the various metrics
quantify credit risk like Probability of Default (PD) a
Loss Given Default (LGD). We finally close this mod (TB, R2 & R3)

with a discussion on methods to mitigate credit r

such as risk based pricing, netting, collateral, covenan
Module 7: Credit Risk Probability of
diversification etc. Default (PD) and
Modelling
Simulation Loss Given Default Simulation
No. of Sessions: 3
(LGD). Excel sheet will be
Creating a hypothetical client (for example credit shared
card) and a bank. Compute the EAD and LGD of
Client; Assume that Bank goes for insurance and
they calculate the EAD from bank's perspective;
insurance company perspective; do these
calculation with and without netting; Compute the
PD and finally compute the RWA for insurance and
bank
This module gives the basic understanding of regulat
framework from the market risk perspective. We w
begin with quantitative aspects of Basel II market r
framework; cover various capital components l
Module 8: Market Regulatory VaR, Stressed VaR and Incremental R
Regulatory VaR, TB, R2 & R3
Risk Regulatory Charge (IRC). We then discuss about differ Stressed VaR and And Credit Suisse
Framework regulatory mandated processes like back testing a Incremental Risk Material (3.2)
Charge (IRC).
No. of Sessions: 3 associated details like definition of Trading PL and
components and also regulatory notification a
reporting exercises. We then finally close this module
having an understanding about Limit Setti
Monitoring, RWA concept and Risk Management Va
Module 9: FRTB & In this module, we cover about the evolving regulat FRTB, CCAR and TB, R2 & R3 and
Economic Risk Credit Suisse
CCAR & ERC landscape and the future of risk management with
Capital (ERC)
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 introduction of new regulations knowns as FRTB a
CCAR. Having discussed the existing framework in t
earlier module, we will discuss the new regulations
detail and assess the scope and impact on the curr
No. of Sessions: 3 framework and also the capital implications due to th
Material (7.2)
regulations. Along with these external regulat
requirements, we will also briefly touch upon the inter
capital measures like Economic Risk Capital (ER
which will capture the exposures from the Econom
perspective rather than from an accounting view.
In the final module, we will conclude the key learnin
Module 10: Dynamic of the entire course and have a working session on r
Hedging and CAPM management through dynamic hedging, understand
(Portfolio Risk hedge ratios, costs, P&L related to risk managemenDynamic Hedging TB, R2 & R3 and
Credit Suisse
Management for The course will end with rounding of risk managem and CAPM
Material (6 & 7.2)
Individuals) for an individual by using concepts of creating effici
No. of Sessions: 3 portfolios and maximizing risk return trade-off.

Evaluation scheme:
Nature of
Component Duration Weightage (%) Date & Time
Component
TBA one week prior to the quiz date,
Quiz-1 5%
10 Minutes Time: Class hour OB
TBA one week prior to the quiz date,
Quiz-2 5%
10 Minutes Time: Class hour OB
November 1st week, 2021 (exact date
Group Assignment 15%
will be posted on CMS) OB
Mid-semester Exam 1.5hour 35% 22/10/2021 1.30 - 3.00PM OB
Comprehensive Exam 2 Hour 40% 23/12 FN OB

*Note: No make-ups for the quizzes & Assignments.

All quizzes & assignments will be counted for final grade calculation.
Consultation Hour: Wednesday & Thursday 4:00 PM to 5:00 PM.
Group Assignment details will be shared on CMS by third week of September 2021. Assignment submission date: November 1 st week
(exact date will be posted on CMS). Soft copy should be sent to bits.drm.assignment@gmail.com. Post due date submissions will not
be considered for evaluation and the entire group will be awarded zero marks in this component. Only 20 percent of the plagiarism is
allowed and thereafter for every 10 percent of additional plagiarism, one mark (or ten points) will be deducted.
Academic Honesty and Integrity Policy: Academic honesty and integrity are to be maintained by all the students throughout the semester
and no type of academic dishonesty is acceptable.

Instructor in Charge
FIN F414
INSTRUCTOR-IN-CHARGE

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