Module                        : FIN 304: Financial Risk Management

           Programme                 : B.Com

Credit Value              : 12     

Prerequisite               : FIN 201: Introduction to Corporate Finance & Financial Management

General Objectives:

·         Become familiar with the range of risks facing corporations and learn how to measure and manage these risks.

·         Become familiar with foreign exchange risk exposures.

·         Become familiar with the concept of hedging and its application.

·         Use derivatives in risk management.

·         Familiarize with various risk measurement techniques.

Learning Outcomes      

Upon the successful completion of this module, student should be able to:

·         define and classify risk and return

·         explain the basics of foreign exchange mechanism and foreign exchange risks

·         explain various risk exposures

·         measure various risks and return parameters

CONTENT

Unit-I: Introduction to Risks                                                                                    (6 Hours)

Definition of Risk: Classification of Risk; Risk and Return trade off, Exchange Risk, Implications of various risks for firms.

Unit-II:  Risk in Foreign Exchange Operations                                                     (8 Hours)

Foreign exchange markets, Exchange rate mechanism, Types of exposure (basic concepts only); Transaction exposure, Translation exposure, economic exposure, management of transaction exposure (simple numerical problems on forward market and money market hedge).

Unit-III: Derivatives                                                                                      (8 Hours)

Introduction to derivatives: Exchange, the mechanism of derivatives markets.

Concept of hedging.

Unit-IV:  Futures                                                                                                      (9 Hours)

Fundamentals of futures contract, types of futures, mechanics and process of future trading in exchanges, operation of margin in stock exchanges (with simple numerical problems), futures payoff mechanism, basics of futures pricing with simple numerical problems, forwards and futures as tools of hedging (long and short hedge with numerical examples).

Unit-V:  Options                                                                                                        (7 Hours)

Overview of put and call options, payoff for long and short options, hedging with options, Straddle, Strangle, Spreads (Bull and Bear).

Unit-VI:    Swaps                                                                                                       (8 Hours)

Interest rate risks, evolution of swaps market, swap terminology, LIBOR (basic concept), basic structure of interest rate swap and uses, designing a simple fixed-for -floating interest rate swap (with basic numerical problems), introduction to currency swap (basic concepts only).

Unit-VII: Risk Insurance:                                                                                        (8 Hours)

Risk transfer concepts, Understanding insurance, workings of insurance, introduction to insurance pricing.

Teaching strategies

·         Lectures

·         Case studies

·         Tutorials

·         Projects.

Assessment

·         Project work/ Assignments                       20%

·         Case studies                                              10%

·         Mid – Semester Exam                               20%

·         End – Semester Exam                               50%

                                                 Total 100%

Essential Texts

1.      Introduction to futures and options; John C. Hull, Prentice Hall

2.      Financial Derivatives; Keith Redhead, Prentice Hall India

3.      Risk management and Insurance; C Arthur Williams, Michael Smith, Peter Young – McGraw Hill

References

1.   Harrington S. & Niehaus, G., Risk Management and Insurance (2008), Tata McGraw Hill, New Delhi, INDIA

2.   Insurance Institute of India (2003), Principles of Insurance.

3.   Jeevanandam, C. (2005). Risk Management. Sultan Chand and Sons, New Delhi, INDIA

4.   Gupta P.K (2004). Insurance and Risk Management, Himalya Publishing House, New Delhi, INDIA

5.   C. Jeevanandan, Foreign Exchange and Risk Management