MSc Financial Risk Management
Programme Content Part 2

Part 2 - Compulsory Modules:

  • Credit Risk
  • Financial Instruments
  • Market Risk

Plus a choice of 40 credits from the optional modules below.

Part 2 - Optional Modules:

  • Bond Market Pricing and Trading Strategies*
  • Commodity Derivatives
  • Financial Regulation and Regulatory Policy
  • Hedging*
  • International Securities Markets
  • Liquidity Risk*
  • Portfolio Management
  • Research Project
  • Volatility Analysis

* Please note that at this time those modules with asterisks against them are not available on a distance learning basis.

Part 2 - Compulsory Modules:


Credit Risk

Convenor: Simone Varotto
Credits: 20

Aims:

This course introduces students to a set of newly developed techniques to measure and manage credit risk in bank portfolios. In recent years financial institutions have been looking at ways to quantify risk in their corporate loan and mortgage books. The lack of market prices for these types of illiquid assets implies that standard risk assessment procedures can not be employed. The course focuses on (1) default and recovery risk, (2) credit ratings and credit scoring models (3) how to measure portfolio credit risk using contingent claim and credit rating based approaches (4) credit risk management tools and (5) credit risk capital regulation (Basel 2).

Intended learning outcomes:

Assessable outcomes

By the end of the module it is expected that students will:

  • Understand the relationship between capital and risk;
  • Be familiar with the latest credit risk capital regulation;
  • Be able to apply Value-at-Risk techniques to portfolios of credit risk sensitive instruments;
  • Be able to derive and use credit ratings and credit scores;
  • Know how to estimate a credit loss distribution and use it for risk management purposes;
  • Understand the main features and implementation of the following models:
    • JP Morgan's CreditMetrics
    • Moody's-KMV model
  • Be able to use risk management tools such as Component VaR and Best Hedge calculated with and without distributional assumptions.

 

Outline content:

  1. Economic and Regulatory capital
  2. Default probability
  3. Credit scoring models
  4. Credit ratings
  5. Recovery risk.
  6. Credit Loss Distribution: Expected and Unexpected Loss
  7. A Rating-based Credit Risk Model: CreditMetrics
  8. An Equity-based Credit Risk Model: KMV
  9. Credit Risk Management Tools

Financial Instruments

Convenor: Leonardo Nogueira
Credits: 20

Aim:

This course is aimed at the synthesis of the finance theory that they have learned in Part I of their MSc. Students will find that the Financial Instruments course will fuse together their knowledge of finance that is gained in Valuation of Securities, with their knowledge of markets obtains in the Financial Markets course and their understanding of Quantitative Methods for Finance.

Outline content:

  • Swaps

  • Credit Derivatives

  • Caps, Floors and Swaptions

  • Convertible Bonds

  • Exotic Options


Market Risk

Convenor: Emese Lazar
Credits: 20

Aims:

This module provides an understanding of the Value-at-Risk (VaR) framework for market risk assessment and control. The module has a significant practical component with computer-based workshops that are designed to support the lecture material.

Outline Content:

  • Market Risk Management

  • Understanding Volatility

  • Covariance Matrices

  • Market Risk Metrics

  • Market Risk Control

  • Value-at-Risk Models

  • Model Validation

  • Scenario Analysis


Part 2 - Optional Modules:

Bond Market Pricing and Trading Strategies*

Convenor: Andy Bevan
Credits: 20

Aims:

The main aims of the module are to identify the fundamental determinants of short- and long-term interest rates, learn how to monitor developments in interest rate markets and employ commonly used trading strategies. The course will be based around the work of a research department in an investment bank when formulating strategy for its proprietary trading desk and hedge fund customers. Each lecture will provide: (1) a concise outline of economic theory, (2) practical examples of events in markets from recent years, and (3) identification of trading strategies. Seminars will focus on market pricing conventions and worked examples.

Outline Content:

  1. Flow of Funds and the Economics of Interest Rates

  2. Monitoring Central Banks and the Determination of Short Rates

  3. Pricing and Trading of Short Rate Instruments

  4. Fundamentals of Bond Pricing, Duration and Convexity

  5. Fitting the Yield Curve and Theories of the Term Structure

  6. Trading of Bonds, Bond Forwards and Futures

  7. Pricing and Trading of Interest Rate Swaps

  8. Swap Spreads and Corporate Bond Spreads Through the Business Cycle

  9. Bond Options and Contingent Cash Flows

  10. Cross-Country Risk and Foreign Exchange

Commodity Derivatives

Convenor: Konstantina Kappou
Credits: 10

Aims:

This module aims to provide students with a detailed knowledge of the Commodity Derivatives Markets. It examines the aspects of pricing and trading physical derivatives and their complexity relative to financial derivatives, with emphasis on the Energy (Oil) and Shipping (Freight) sectors

Outline Content:

  • Introduction to Commodity Markets, History and Evolution

  • Precious Metals. Energy Products. Soft Commodities

  • Main Market Players and Foward Curve. Basis Risk

  • Commodity Derivatives. Exchanges and OTC transactions

  • The Oil Market and its Mechanisms.  OPEC and DOE. Crude Supply and Demand.  Inventories

  • Crude Products and Crack Spreads

  • Refineries and Margins

  • The Freight Market and its Mechanisms.  The Baltic Exchange and the Shipping Industry.  Forward Freight Agreements.

  • Pricing of Commodity Derivatives - Swaps, Options and Structured Trades

  • Trading Techniques and Numerical Examples

Financial Regulation and Regulatory Policy

Convenor: Richard Dale
Credits: 10

Aims:

This module aims to provide both a theoretical basis for financial regulation and a description of its practical application. The focus is on prudential regulation that is designed to maintain systemic stability while also protecting depositors, investors and counterparties in banking, securities and derivatives markets. The module explores a number of key regulatory policy issues, including the balance between official and self-regulation, the nature and scope of ‘moral hazard’ in financial markets and alternative approaches to capital adequacy assessment.

Outline Content:

Topic 1: The objectives, techniques and scope of financial regulation. The moral hazard issue. Preventive versus protective regulation.
Topic 2: Preventive regulation. Capital adequacy: the 1988 Basle Accord, the 1997 Market Risk Amendment and the EU Capital Adequacy Directive.
Topic 3: Alternative approaches to capital adequacy assessment: the 1999 Basle proposals, the pre-commitment approach and the use of market indicators (credit ratings and subordinated debt).
Topic 4: Protective regulation: deposit insurance and the lender of last resort.
Topic 5: The separation issue: the regulatory interface between banking and securities business: Regulating financial conglomerates.
Topic 6: Risk and regulation in derivatives markets.
Topic 7: isk and regulation in payments, clearing and settlement systems.
Topic 8: The structure of financial regulation.
Topic 9: International regulatory co-operation.
Topic 10: Anatomy of a crisis: the Asian debt crisis and its regulatory implications.
 

Hedging

Convenor: Jacques Pézier
Credits: 20

Aims:

This course is designed for students seeking a career in ‘front office’ risk management whether in banks, fund management or corporate treasury. Hedging is financial risk management in action; it is often cited as the raison d’etre of derivatives markets – trading and arbitrage playing the supporting roles of providing liquidity and keeping prices fair and thus facilitating hedging. Corporates can reduce uncertainty by hedging away financial risks that fall beyond their areas of competence; fund managers can design hedge strategies that provide risk/reward profiles tailored to their clients; but it is in banking, which core activity is financial risk management, that efficient hedging makes the difference between success and failure.

Outline Content:

Topic 1: Assessment of risk, risk attitude, risk adjusted performance measures
Topic 2: Risks in financial markets and hedging principles
Topic 3: Market Risk: Static Hedging
Topic 4: Market Risk: Dynamic delta hedging
Topic 5: Market Risk: Gamma and volatility hedging; portfolio insurance
Topic 6: Credit Risks: Credit derivatives and other forms of credit risk mitigation
Topic 7: Multifactor hedging: Forex and interest rate risks
Topic 8: Impact of hedging on regulatory and economic capital
Topic 9: Hedging programmes banks, investment firms and corporates.

International Securities Markets

Convenor: John Evans
Number of credits: 10
Terms in which taught: Autumn

Aims:

International Securities Markets applies general valuation risk assessment methods to: fixed income securities, derivatives and markets. It describes the basic characteristics of each fixed-income security, cash and underlying, and develops practical strategies for finding its value and assessing its risk. It also considers how the markets for these securities are related and begins the task of showing how these relationships can be exploited for trading or investment.

The analytical techniques introduced in this module are applied to allow the successful candidate to apply directly to industry the more theoretical market valuation and risk models learned in other core modules taken in the first term.

Outline Content:

  • Topic 1 - Fixed Income Analysis.

  • Topic 2 - Fixed Income Analysis.

  • Topic 3 - Rates Trading and Hedging I.

  • Mid-term test 1

  • Topic 4 - Rates Trading and Hedging II.

  • Topic 5 - Credit Analysis and Products I.

  • Topic 6 - Credit Analysis and Products II.

  • Mid-term test 2

Liquidity Risk*

Convenor: Alfonso Dufour
Credits: 10

Aims:

The evolution of algorithmic trading, the proliferation of alternative trading platforms for trading the same security and the development of new products and assets with limited liquidity have contributed to raising the awareness of academics and traders on the importance of understanding and properly managing liquidity and execution risks.

The objective of this course is to give students an introduction to liquidity and execution risks and an overview of the methods for managing these risks. The issues discussed in this course are important when developing trading strategies, valuing portfolios, liquidating large positions and transitioning assets to new investments.

Outline content:

  1. Introduction. Security trading industry.

  2. New market mechanisms, intercontinental exchanges and regulatory challenges: fragmentation and consolidation (NYSE-Euronext, NASDAQ-OMX, LSE-Borsa Italiana).

  3. MiFID and Reg-NMS.

  4. Recent regulatory trends and expected impacts on markets (Transparency, Fragmentation, Internalisation)

  5. Traders and their motivation to trade. Profit motivated traders. Utilitarian traders. Liquidity suppliers.

  6. Order book trading: The LSE rule book

  7. Transaction cost measurement

  1. Execution Risk and Optimal Trading Strategies.

Portfolio Management

Convenor: Jacques Pezier
Credits: 20

Aims:

The module aims to build on the techniques for portfolio selection that will have been introduced in the Securities, Futures and Options module. The module will address both the theory and practice of portfolio management. The theoretical part will examine the issues involved in constructing an investment portfolio, evaluating the performance of that portfolio, and adjusting its composition through time to ensure that its performance remains optimal. It will also consider the use of derivatives in managing risk. The practical part will provide students with hands-on experience of constructing and managing an equity portfolio.

Research Project

Convenor: Charles Sutcliffe
Credits: 20

Aims:

The aim of the research project is to allow students to define and execute a piece of research in finance on a topic of their choice, with direction from an academic supervisor and with assistance from a doctoral student support supervisor.

Outline Content:

The self-directed nature of study for this model should encourage students to be resourceful in their search for relevant literature and data, and to manage the various stages involved effectively, leading to timely submission of the finished piece.

Volatility Analysis

Convenor: Carol Alexander
Credits: 20

Aims:

This module provides an in depth understanding of the different approaches to modelling financial market volatility in discrete and continuous time. The module will focus on GARCH statistical models and the local and stochastic volatility models that are now in standard use by leading industry practitioners, and which have been the subject of extensive academic research. It is has a high quantitative content and a significant practical component with computer-based workshops (face-to-face and distance) designed to support the material.

Outline Content:

  • Statistical models of Volatility and Correlation

  • Normal mixture models

  • Normal and normal mixture GARCH

  • Principal Component Analysis: Applications to building covariance matrices

  • Modelling Implied Volatilities and their dynamics

  • Local Volatility models

  • Stochastic Volatility Models