FIN8107 Financial Risk Management
|Semester 2, 2012 On-campus Toowoomba|
|Faculty or Section :||Faculty of Business and Law|
|School or Department :||School of Accounting, Economics and Finance|
|Version produced :||30 December 2013|
Examiner: Taiji Watanabe
Moderator: Chandrasekhar Krishnamurti
Students are advised that they would be well served having completed a minimum of Level 1 undergraduate finance courses before attempting this course. Advanced mathematical skills will be an advantage in completing this course successfully.
Students are required to have access to a personal computer, e-mail capabilities and Internet access to UConnect. Current details of computer requirements can be found at http://www.usq.edu.au/current-students/support/computing/hardware.
When conducting almost all forms of competitive business activity, an understanding of financial risk measurement and management has become essential to survival. Financial risk relates to the volatility of outcomes or unexpected changes in financial variables. The deregulation and/or globalisation of financial and goods markets has resulted in the need for increased awareness by corporations and some individuals, as financial and pricing decisions are exposed to competitive global market forces. This financial risk principally arises due to unexpected changes in interest rates, exchange rates, commodity prices and equity price movements. Given a prioritization of financial risks, management and individuals must decide in each case what their preferred method of dealing with or avoiding those risks will be. In response to the challenge of managing these risks, derivative instruments have provided the means for the financial engineering of strategies relevant to the risk management needs of firms and individuals.
This course commences by examining the nature and scope of financial risk management as it applies to participants in financial markets. Given no arbitrage opportunities or risk neutral pricing as appropriate, the simplest forms of derivatives (forwards and futures) are then introduced in terms of the mechanics and strategies of these markets together with the theoretical pricing of forward/futures contracts. Given that a swap is nothing more than a convenient way of bundling forward contracts, an introductory exploration of the issues relating to interest rate and currency swaps is then undertaken although the detailed pricing of these instruments is left for a more advanced course. The varied world of options is then explored with particular emphasis on the mechanics of options markets and the properties and strategies of option contracts/positions. Both the binomial and Black-Scholes option pricing models are treated in detail together with variations in the application of these models to assets other than equities (stocks). The Greek Letters and Value at Risk are of considerable importance to derivative market makers and/or financial institutions and these concepts are then treated at the introductory level. The course concludes with a general review of contemporary issues with specific reference to any part played by derivatives in those events.
On successful completion of this course, students should be able to:
- describe the nature of financial risks and suggest practices for their quantification and management in order to solve various problems facing financial institutions and corporations
- demonstrate an understanding of the operation and instruments available in forward/futures markets (OTC and exchange traded) together with the theoretical pricing principles of those contracts
- demonstrate an understanding of the mechanics, comparative advantages, pricing and valuation of interest rate and currency swaps
- demonstrate an understanding the operation of options markets and the relevant numeracy skills by pricing of the standard option contract using both binomial and Black-Scholes methodology
- demonstrate the creativity and initiative required of a financial services professional by extending the standard stock option concept to stock indices, currencies and futures contracts
- demonstrate the critical literacy skills required of a financial services professional by analysing various risk exposures and develop strategies for the management of interest rate, exchange rate, commodity price and equity price exposures using an appropriate instrument(s) covered in the course
- apply the 'Greek Letters' and 'Value at Risk' concepts to market making by dealers and portfolios of assets held by financial institutions, respectively
- discuss the important role that no-arbitrage opportunities and/or risk-neutral valuation plays in the pricing of all the above derivatives
- evaluate the role securitization played in the credit crisis (GFC) of 2007 and have a general appreciation of derivatives mishaps and what can be learnt from them.
|1.||Introduction to risk management||5.00|
|3.||Futures markets - mechanics and strategies||10.00|
|4.||Futures markets - pricing and interest rate futures||15.00|
|6.||Options - mechanics, properties and strategies||10.00|
|7.||Options - pricing||15.00|
|8.||Options - variations||5.00|
|9.||Greek letters and value at risk||10.00|
|10.||Capstone issues and review||5.00|
Text and materials required to be purchased or accessed
ALL textbooks and materials available to be purchased can be sourced from USQ's Online Bookshop (unless otherwise stated). (https://bookshop.usq.edu.au/bookweb/subject.cgi?year=2012&sem=02&subject1=FIN8107)
Please contact us for alternative purchase options from USQ Bookshop. (https://bookshop.usq.edu.au/contact/)
Hull, JC 2011, Fundamentals of futures and options markets - solutions manual and study guide, 7th edn, Prentice Hall, Upper Saddle River, New Jersey.
Hull, JC 2011, Fundamentals of futures and options markets, 7th edn, Prentice Hall, Upper Saddle River, New Jersey.
It is intended that the two recommended texts will be available as a shrinkwrap package from the USQ Bookshop at a discounted price for students.
Chance, DM & Brooks, R 2010, An introduction to derivatives and risk management, 8th edn, South-Western Cengage Learning, Mason, Ohio.
Copeland, TE, Weston, JF & Shastri, K 2005, Financial theory and corporate policy, 4th edn, Pearson Addison Wesley, Boston, Massachusetts.
Hull, JC 2006, Options, futures, and other derivatives, 6th edn, Pearson/Prentice Hall, Upper Saddle River, New Jersey.
Kolb, RW & Overdahl, JA 2007, Futures, options and swaps, 5th edn, Blackwell, Malden, Massachusetts.
McDonald, RL 2006, Derivatives markets, 2nd edn, Addison Wesley, Boston, Massachusetts.
Student workload requirements
|Description||Marks out of||Wtg (%)||Due Date||Notes|
|ONLINE QUIZ||20||20||06 Aug 2012|
|ASSIGNMENT||30||30||12 Oct 2012||(see note 1)|
|2-HOUR EXAMINATION||50||50||End S2||(see note 2)|
- The assignment consists of five (5) quantitative problem questions that cover the first ten weeks course content. Students are encouraged to complete these in a timely fashion and then lodge all five answers by the due date.
- The examination is scheduled to be held in the end-of-semester examination period. Students will be advised of the official examination date after the timetable has been finalised.
Important assessment information
It is the students' responsibility to attend and participate appropriately in all activities (such as lectures, tutorials, laboratories and practical work) scheduled for them, and to study all material provided to them or required to be accessed by them to maximise their chance of meeting the objectives of the course and to be informed of course-related activities and administration.
Requirements for students to complete each assessment item satisfactorily:
To satisfactorily complete an individual assessment item a student must achieve at least 50% of the marks. (Depending upon the requirements in Statement 4 below, students may not have to satisfactorily complete each assessment item to receive a passing grade in this course.)
Penalties for late submission of required work:
If students submit assignments after the due date without prior approval of the examiner, then a penalty of 5% of the total marks gained by the student for the assignment may apply for each working day late up to ten working days at which time a mark of zero may be recorded.
Requirements for student to be awarded a passing grade in the course:
To be assured of receiving a passing grade a student must achieve at least 50% of the total weighted marks available for the course.
Method used to combine assessment results to attain final grade:
The final grades for students will be assigned on the basis of the aggregate of the weighted marks obtained for each of the summative assessment items in the course.
This will be an open examination. Candidates may have access to any printed or written material and a calculator during the examination.
Examination period when Deferred/Supplementary examinations will be held:
Any Deferred or Supplementary examinations for this course will be held during the next examination period.
University Student Policies:
Students should read the USQ policies: Definitions, Assessment and Student Academic Misconduct to avoid actions which might contravene University policies and practices. These policies can be found at http://policy.usq.edu.au.
Assignments: (i) The due date for an assignment is the date by which a student must despatch the assignment to the USQ. The onus is on the student to provide proof of the despatch date, if requested by the examiner. (ii) Students must retain a copy of each item submitted for assessment. This must be produced within 24 hours if required by the examiner. (iii) In accordance with university policy, the examiner may grant an extension of the due date of an assignment in extenuating circumstances. All applications for assignment extensions must be accompanied by appropriate supporting documentation. Under no circumstances will assignments submitted more than two calendar weeks after the due date be accepted. (iv) The examiner will not accept submission of assignments by facsimile. (v) Assignments are to be submitted in the appropriate assignment folders.
Referencing in assignments: Harvard (AGPS) is the referencing system required in this course. Students should use Harvard (AGPS) style in their assignments to format details of the information sources they have cited in their work. The Harvard (AGPS) style to be used is defined by the USQ Library's referencing guide at http://www.usq.edu.au/library/referencing.
Course weightings: Course weightings of topics should not be interpreted as applying to the number of marks allocated to questions testing those topics in an examination paper. The examination may test material already tested in assignments.
Computer, e-mail and Internet access: Students are required to have access to a personal computer, e-mail capabilities and Internet access to UConnect. Current details of computer requirements can be found at http://www.usq.edu.au/current-students/support/computing/hardware.