Financial Risk Management Table of Contents

TABLE OF CONTENT

Chapter 1 - Risk Basics & Fundamentals

  • Nature of Risk
  • Sources of Risk
  • Need for Risk Management
  • Process of Risk Management
  • Risk Policy
  • Risk Management Approaches
  • Introduction to no-arbitrage principles  

Chapter 2 - Risk Classification

  • Credit Counterparty Risk
  • Market Risk
  • Operational Risk
  • Liquidity risk  
  • Other Risks

Chapter 3 - Measuring Risk

  • Measurement of Credit Risk
  • Measurement of Market Risk
  • Measurement of Interest Rate Risk and Asset Liability Management (ALM)
  • Measurement of Operational Risk
  • Beyond variance — Alternative risk measures
  • Statistical biases in performance evaluation — survivorship bias and data snooping

Chapter 4 - Mathematical & Statistical Foundations

  • Review of basic probability
  • Conditional expectations and variances
  • Multivariate distributions
  • The multivariate normal distribution
  • Introduction to martingales
  • Introduction to Brownian motion
  • Geometric Brownian motion
  • Review of vectors and matrices
  • Linear optimization
  • Nonlinear optimization

Chapter 5 - Interest Rates & Fixed Income Instruments

  • Interest rates and fixed-income instrument types
  • Floating rate bonds
  • Term structure of interest rates
  • Term structure lattice models
  • Cash account and pricing zero-coupon bonds
  • Forward equations
  • Model calibration
  • BDT model — pricing a payer swaption (applied example)
  • Fixed income derivatives pricing in practice

Chapter 6 - Derivatives — Forwards, Futures & Swaps

  • Forward contracts
  • Swaps
  • Futures
  • Futures pricing in Excel (practical session)
  • Fixed income derivatives — options on bonds
  • Fixed income derivatives — bond forwards
  • Fixed income derivatives — bond futures
  • Caplets and floorlets
  • Swaps and swaptions
  • Pricing forwards and futures in the binomial model

Chapter 7 - Options & Options Pricing

  • Introduction to options
  • Options pricing fundamentals
  • The 1-period binomial model
  • Option pricing in the 1-period binomial model
  • The multi-period binomial model
  • Intuition behind binomial pricing 
  • Pricing American options
  • Replicating strategies
  • Including dividends
  • The Black-Scholes model (introduction)
  • The Black-Scholes model (deeper treatment)
  • Pricing a European put on a futures contract (applied example)
  • Bull and bear spreads
  • Delta neutral strategies
  • Binomial model 

Chapter 8 - The Greeks & Derivatives Risk Management

  • Delta and gamma
  • Vega and theta
  • Risk management of derivatives portfolios
  • Delta-hedging

Chapter 9 - Volatility Surface & Advanced Options

  • The volatility surface
  • The volatility surface in action
  • Why is there a skew?
  • What the volatility surface tells us
  • Pricing derivatives using the volatility surface
  • Beyond the volatility surface and Black-Scholes

Chapter 10 -  Portfolio Theory and Capital Asset Pricing

    • Overview of mean-variance analysis
    • Mean-variance analysis in Excel (practical session)
    • The efficient frontier
    • Mean-variance with a risk-free asset
    • Risk-free frontier in Excel
    • Capital asset pricing model (CAPM)
    • Implementation difficulties with mean-variance
    • Negative exposures and leveraged ETFs

    Chapter 11 - Credit Risk — Managing & Modelling

    • Managing credit risk
    • Credit ratings
    • Credit derivatives
    • Modelling defaultable bonds
    • Pricing defaultable bonds
    • Credit default swaps (CDS)
    • Pricing credit default swaps

    Chapter 12 - Structured Credit — CDOs & Beyond

    • Structured credit and CDOs
    • The Gaussian copula model
    • A simple CDO example — Part I & Part II
    • Mechanics of a synthetic CDO tranche
    • Computing the fair value of a CDO tranche
    • Cash and synthetic CDOs
    • Pricing and risk management of CDO portfolios
    • CDO-squared and beyond

    Chapter 13 - Mortgage-Backed Securities

    • Introduction to mortgage mathematics
    • Prepayment risk and mortgage pass-throughs
    • Mortgage pass-throughs in Excel (practical session)
    • Principal-only and interest-only MBS
    • Risks of PO and IO MBS
    • Collateralised mortgage obligations (CMOs)
    • Pricing mortgage-backed securities

    Chapter 14  - Liquidity, Execution & Real Options

    • Liquidity, trading costs and portfolio execution
    • Optimal execution
    • Portfolio execution strategies
    • Optimal execution in Excel — Part I & Part II
    • Real options
    • Valuation of natural gas and electricity options
    • Real options in Excel

    Chapter 15  - Regulatory Framework & Basel II

    • Regulatory framework overview
    • The Basel Committee
    • Three pillars of Basel II
    • Scope of application
    • Pillar 1 — minimum capital requirements
    • The standardised approach
    • The internal ratings based (IRB) approach
    • Pillar 2 — supervisory review process
    • Pillar 3 — market discipline
    • Market risk under Basel II
    • Operational risk under Basel II

    Chapter 16  - Other Issues in Risk Management

    • Best practices in risk management
    • Challenges to risk management
    • Accounting issues
    • Tax issues
    • Management information systems (MIS)
    • Integrated risk management
    • Insurance as a risk management tool

    Chapter 17  - Case Studies in Financial Risk

    • Barings Bank
    • Herstatt Bank
    • Long-Term Capital Management (LTCM)
    • Enron
    • Orange County
    • Practitioner perspective 
    • Conclusion 


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