Financial Risk Management

In this course we study how you can reduce different types of financial risks. The Financial Risk Management course is interesting for (i) future entrepreneurs, (ii) entrepreneurs who work at small or middle-sized already established and well-functioning firms, or (iii) persons who work at small, middle-sized, or large firms. We assume that the firm has positions in physical assets to be bought or sold at the market in the future or it has positions in financial assets (for example, currency exchange rates or financial assets held for investment purposes).

Efficient management of financial risks can influence the value of a company in a positive way. There are different reasons in practice for a company to have financial risks. For example: (i) For a producer of goods such as coffee, banana, or sugarcane, income may depend on future sales prices of the goods that are not known at the beginning of the agricultural season. (ii) For an exporter or importer, the currency exchange rate may influence the income or expenses of the company. (iii) A well-established company may invest part of its capital into financial assets that may have significant risks (e.g., shares of other companies; investment funds; bonds issued by other companies; government treasuries).

For at least thousands of years there have been financial products today called “financial derivatives” that have been created to manage financial risks. Since the end of the 19th century and especially in the last decades, the variety of financial derivatives has increased significantly. In this course the focus of the topics is the presentation of financial derivatives, their use to manage financial risks and study how to measure financial risks. We see futures, forwards, options, and swaps, to manage price risks. We also see credit derivatives to manage credit risks of obligations.

Many of the financial derivatives are available on organized derivatives markets, but there are also financial derivative contracts that are signed between companies outside of the financial market. In this course see the practical use of both types of financial derivatives. For financial derivatives that are listed on organized derivatives exchanges we take the point of view of a company that carries out its operations in another country than the derivatives exchange.

Financial risk varies over time and risk managers are interested in following the evolution. We study different methods to measure the level of financial risk. Specifically, we are going to see how to measure the evolution of the price risk of financial assets, using dynamic volatility models (by statistical methods), implied volatility (using the prices of quoted options) and how to measure extreme risks of portfolios (i.e., value-in-value and expected shorfall). The focus is practical use, and the presentation of all financial risk management techniques is through case studies.