COURSE OUTLINEManagement Development Institute, Gurgaon

Financial Risk ManagementBATCH: NMP-28

TERM: IIICOURSE CREDIT: 1

NUMBER OF SESSIONS: 20COURSE INSTRUCTOR: S. VEENA IYER

Phone: 0124-4560185 or Ext: 5185E-mail: s.veena@mdi.ac.in

OBJECTIVES OF THE COURSE:Managing business risks involves both reducing as well as embracing risk. This course attempts to introduce the larger idea of how firms might view risk in their business and use financial derivatives to manage them. It attempts a fine balance between institutional details, theoretical foundations, and practical applications. This course largely focuses on market risks and credit risks faced by businesses and their management using financial derivatives products. Notwithstanding the finance discipline underpinnings of this course, the perspective it takes is a business one. Therefore, it has relevance for any business manager or decision maker even if he/she may not be involved in actually creating and trading in derivative products. Emphasis in this course will be on identification of the sources of financial risks; measurement of risks and management of risks. Derivative products are used widely by commodity firms, investment banks as well as by individual and institutional investors.

TEXT BOOK: Fundamentals of Futures and Options Markets by John C. Hull, Eighth edition, Peason

SUPPLEMENTARY BOOKS:1. Aman Chugh and Divik Maheshwari, “Financial Derivatives: The Currency and Rates Factor”, Pearson, 20132. Rajiv Srivastava, “Derivatives and Risk Management”, Oxford University Press, 2010. Selected chapters

from the above books will be used.

COURSE REQUIREMENTS:The students will be assigned readings from the text book and course material pack; and they will be expected to come to class prepared and ready to take part in class discussions. Regular attendance is essential for understanding and performing well in this course. Students are hence, advised to not miss classes unless absolutely essential. In case of such absence, it is up to the student to find out what has been covered in class and get up to speed.

GRADING: Your total score in the course will be determined by the following weights:

Assignments 20% Quizzes 20% Mid Term 30% End Term 30%

ASSIGNMENT:There will be a group assignment. The class would be split into groups. Each group will have one assignment during the course period which will take the form of a 20 minute presentation based on an assigned issue/problem. The assignment will be graded on the intellectual coherence and overall quality of the typed text plus the quality of the presentation which will also include aspects such as presentational innovation and time management.

OTHER INFORMATIONRecommended to carry calculator (or lap top), and course material to all the sessions. The course outline and accompanying assignment schedule are subject to change.

COURSE CONTENT:1. Risk and Risk Management: Theory (2 sessions)a) Why is financial risk management important?b) Why do firms hedge financial risks?c) Risk management in banks and other financial institutions

Case: Advising on currency risk at ICICI Bank

Readings: Owning the right risk: Kevin Buehler, Andrew Freeman, and Ron Hulme, Harvard Business Review,

September 2008. The Six Mistakes Executives Make in Risk Management, Nassim N. Taleb, Daniel J. Goldstein, and Mark W.

Spitznagel , Harvard Business Review, October 2009.

2. Forwards and Futures (4 sessions)a) Introduction to financial forwards and futuresb) Pricing and valuation of forwards and futuresc) Hedging and basis riskd) Commodity futures and trading

Readings: Chapters 2,3,5 of text Financial futures: Scott P Mason, Harvard Business School, December 1999 Derivatives can be hazardous to your health: The case of Metallgesellschaft.

3. Options (3 sessions)a) Introducing Options: Call and Putb) Options arbitrage relationshipsc) Option pricing models: BOPM & BSMd) Options prices and valuations of optionse) Options Greeks and delta hedging

Cases: Chapters 9-15, 17, 19 of text (selected portions only, will be informed) Larry Steffen: Valuing Stock Options in a Compensation Package

4. Consolidated case: (1 session) Hedging Currency risk at AIFS

MID-TERM EXAMINATION

5. Swaps (3 sessions)a) Introduction to Swapsb) Types of Swaps : Interest rate swap and currency swapc) Pricing and valuation of swaps

Case: B.F. Goodrich-Rabobank Interest rate swap Advising on currency risk at ICICI Bank (revisited)

Readings: Chapter 7 of text Interest rate swaps, by Westpac Banking Corporation Foreign Currency Swap, Harvard Business School, 1996

6. Credit Risk Management and Credit Derivatives (3 sessions)a) Managing credit risk and credit derivativesb) Credit Default Swaps(CDS) and Collateralized Debt Obligations (CDOs)

Cases: Saginaw Parts Co. and the General Motors Corp. CDS

Readings: Chapter 23 of text

7. Interest Rate Derivatives (2 sessions)a) Interest rate futuresb) Hedging strategies using interest rate futuresc) Interest rate futures in India

Readings: Chapter 6 of text Interest Rate Futures, National Stock Exchange, India

8. Project Work and Presentations (2 sessions)