Module Code and Title:   FIN305 Financial Risk Management    

Programme:                          Bachelor of Commerce

Credit Value:                          12

Module Tutor:                       Tirtha Raj Puri, Gagan Mongar

Module Coordinator: Tirtha Raj Puri

General objective: The objective of this module is to provide students with an understanding of financial risk faced by businesses and apply the concepts in managing those risks. The students will be familiarized with various risk measurement techniques that will enable them to develop and implement the most appropriate strategy to mitigate such risk.

Learning outcomes – On completion of the module, students will be able to:

1. Identify different types of risks faced by the businesses based on risk and return trade off in financial decisions. 
2. Analyze financial risk exposure of businesses and select an appropriate technique to manage risk.
3. Apply the concepts of Hedging to reduce risk in forward market and money market hedge.
4. Analyze the impact of interest rate risk and develop a strategy to reduce such risk.
5. Use mathematical techniques to calculate the frequency and severity of losses, and analyse the impact of risk reduction interventions. 
6. Analyse the cost and benefit of derivative instruments in hedging financial risk. 
7. Assess the relevance, effectiveness and cost of financial risk management techniques as they relate to different types of risks.
8. Anticipate and manage new or changing risks, and influence the outcomes where possible. 

Teaching and Learning Approach:

Assessment Approach:

Each student will complete a written assignment of 1500 words, followed by a viva. The students will choose a Bhutanese or a global company and identify all the risks faced by the company, discuss how the company has managed the risks and use any applicable tools to quantify those risks.

3%       using the correct procedure(s)

4%       applying the right tool for measuring risk 

4%      drawing the correct conclusions by the use of relevant theories

4%      viva

Each student will solve four specific problems in-class (5% each, 45 min duration) on derivatives to compute the risk associated with the use of hedging techniques. 

Student groups of 5 members will use one of the companies selected in assignment 1 and assess the relevance, effectiveness and cost and benefit analysis of risk management techniques adopted by the company. The resulting report should be approximately 3000 words, and include problem definition, data, analysis, conclusions and recommendations. The group presentation will be approximately 15 minutes, and should be inclusive of slides.   

Written report (10%):

1%       clear definition of the problem

2%       usage of appropriate financial techniques

1%       usage of secondary data sources

1%       referencing (strict adherence to APA guidelines)

1%       analysis of the problem

1%       conclusion and recommendations

3%       individually assessed process score (contribution to the group output)

Presentation (5%):

2.5%    group presentation mark (cohesiveness, organization, level of professional delivery)

2.5%    individual presentation mark (clarity, conciseness, ability to respond questions, tone)

Each student will contribute to class discussions by answering questions, stating their opinions, listening to the ideas of others on the various issues relating to financial issues and risk management.   

3%       leading class discussion

2%       listening to and responding logically to the viewpoints of others

Students will take a written exam of 2 hours duration covering topics up to the mid-point of the semester.

The module will have a semester-end exam for 2 hours covering the entire syllabus. The question will be divided into two parts – Part A (carrying 40% of the exam weightage) will be mostly of short answer including objective questions. Part-B (carrying almost 60% of the exam weightage) will be mostly of essay type or an extended response to the given question. This part of the question requires students to apply, analyse, and evaluate or construct knowledge and skills. Cases will also be used to test the levels of knowledge.

Pre-requisites: FIN201 Fundamentals of Corporate Finance

Subject matter:

1. Introduction to Risks                                                                                  
   1. Definition of Risk
   2. Classification of Risk
   3. Risk and Return trade off
   4. Implications of various risks on firm’s value.

1. Risk in Foreign Exchange Operations                                                     
   1. Foreign exchange markets
   2. Exchange rate mechanism
   3. Types of exposure (basic concepts only)
      1. Transaction exposure,
      2. Translation exposure
      3. Economic exposure
      4. Management of transaction exposure (simple numerical problems on forward market and money market hedge).

1. Derivatives                                                                                                 
   1. Introduction to derivatives
      1. Exchange
      2. The mechanism of derivatives markets
   2. Concept of hedging.

1. Futures                                                                                                      
   1. Fundamentals of futures contract,
   2. Types of futures
   3. Mechanics and process of future trading in exchanges
   4. Operation of margin in stock exchanges (with simple numerical problems)
   5. Futures payoff mechanism
   6. Basics of futures pricing with simple numerical problems
   7. Forwards and futures as tools of hedging (long and short hedge with numerical examples).

1. Options                                                                                                      
   1. Overview of put and call options
   2. Payoff for long and short options
   3. Hedging with options
      1. Straddle
      2. Strangle
      3. Spreads (Bull and Bear).

1. Swaps                         
   1. Interest rate risks
   2. Evolution of swaps market
   3. Swap terminology
   4. LIBOR (basic concept)
   5. Basic structure of interest rate swap and uses
   6. Designing a simple fixed-for -floating interest rate swap (with basic numerical problems)
   7. Introduction to currency swap (basic concepts only).

1. Risk Management                                                                          
   1. Meaning & objectives of risk management
   2. Different kind of risks
   3. Benefits of risk management
   4. Process of risk management
      1. Identifying loss exposures
      2. Analyzing the loss exposures
   5. Selection of appropriate techniques for risk management 

Reading List:

1. Essential Reading
   1. Hull, J. C., & Basu, S. (2016). Options, Futures, and Other Derivatives (7th ed.). New Delhi: Pearson. 
   2. Madura, J. (2010). Derivative Security Markets. In J. Madura, Financial Markets and Institutions (pp. 325 - 456). Mason: South-Western Cengage Learning. (eBook available)
2. Additional Reading
   1. Clark, G. L., Dixon, A. D., & Mo, A. H. (Eds). (2009). Managing Financial Risks: From Global to Local. Oxford: Oxford University Press.
   2. Donefer, B. S. (2014). Leonard N. Stern School of Business, New York University. Retrieved September 30, 2014, from NYU Stern Pages: http://pages.stern.nyu.edu/~bdonefer/Risk_Syllabus.pdf
   3. Eun, C. S., & Resnick, B. G. (2008). International Financial Management. New Delhi: Tata McGraw-Hill.
   4. Stephen A. & Ross, R. W. (2013). Fundamentals of Corporate Finance (10 ed.). Tata McGraw-Hill Edition. (eBook available)
   5. Vohra, N. D., & Bagri, B. R. (1998). Futures and Options (2nd ed.). New Delhi: Tata McGraw Hill.

Date: July, 2017