Course Detail

Cases in Financial Risk Management (35131)

Course Description by Faculty

  • Veronesi, Pietro
  • Content

    The spike in oil prices in early 2022 highlights once again the benefits of hedging. As the Wall Street Journal titles "Hedged Give Companies Temporary Reliefs from Surging Energy Prices" (March 14, 2022). Similar risks and the need of their risk management occur throughout time across markets, such as currencies, commodities, interest rates, stocks, and so on. This course uses the case method to introduce students to several financial instruments (forward, futures, options, hybrid securities) and their applications to corporate financial risk management. Data show that 95% of Fortune 500 firms and over 60% of all non-financial firms use financial instruments to manage financial risk. We discuss several case studies to illustrate the use – and misuse – of financial instruments. The case studies range in topics from the hedging needs of Airbus’ maker EADS and the gold mining company American Barrick, to the debacle of AIG and the role of credit derivatives in the 2007 - 2008 financial crisis. We will also discuss several recent market dislocations, such as the large basis in foreign exchange markets as well as the reason behind the negative oil prices in March 2020. Finally, the course covers several important risk-management tools widely used in the industry, including Value at Risk, Cash-flow at Risk, Credit at Risk, Liquidity VaR, Expected Shortfall, Backtesting, as well as their pros and cons.

    At the end of the course, students will be knowledgeable of the costs and benefits of financial risk management, will understand the potential pitfalls in numerous measures of risk, and will see the benefits and costs of using financial derivatives as instruments to hedge financial risk. Students will also learn the steps required to set up an effective enterprise-wide risk management system for both financial and non-financial institutions. For these reasons, this course will especially benefit students with career goals consulting, investment banking, sales and trading, and corporate treasury.

  • Prerequisites
    Corporation finance (35200 or 35801) is a strict prerequisite. Case analysis and homework assignments will also require the use of Microsoft Excel spreadsheets. I will make available several spreadsheets implementing Monte Carlo simulations for risk measurement and asset valuation.
  • Materials
    Cases, notes, and readings in Canvas. Robert L. McDonald, Derivative Markets (3rd Edition), Prentice Hall, 2009, ISBN 978-0321543080;
  • Grades
    Grading will be based on class participation, the short memoranda, technical homeworks and a final examination.
  • Syllabus
  • Summer 2022Section: 35131-81W 6:00PM-9:00PMGleacher Center308In-Person Only
Description and/or course criteria last updated: May 10 2022