SVKM’s

NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES

MASTER OF BUSINESS ADMINISTRATION

Program: MBA Trimester: V

Course: Financial Risk Management Code:
(FRM)
Teaching Scheme: Evaluation Scheme:
Classroom Practical/ Tutorials
Credit Continuous Term End Examination
Session Group work Evaluation (TEE)
20 60% 40%
Course Rationale:
This course deals with the ways in which financial institutions quantify and manage risks. It looks at why
banks need to manage different financial risks, identification and estimation of risks, as well as current
issues. Among the topics covered are the nature of financial institutions and their regulation, market risk,
credit risk, operational risk, liquidity risk, and the lessons from the credit crisis, which started in 2007. It
deals with different stages within the overall risk management processes. It examines internal and
external influences separately.

Course Objectives:
1. Provide comprehensive knowledge about various types of financial risks;
2. Provide good amount of wisdom how to calculate different types of risks using different models and
approaches.

Learning Outcomes:
On completion of the course, the participant will be able to:
1. Identify all major sources and kinds of risks faced by large financial institutions;
2. Critically evaluate the principles and guidelines for the effective management of financial risks by the
banks.
3. Gain knowledge required to estimate different financial risks in quantitative terms and apply various
models and techniques is financial institutions risk management

Prerequisite(s):
 Corporate Finance;
 Commercial Bank Management;
 Derivatives

Pedagogy:
 A combination of lectures, presentations, pre-class readings, case discussions and problem solving on
MS Excel will help students develop knowledge and maturity of judgment with respect to Financial
Risk Management.
 The course requires a thorough preparation on the part of the students. Students are expected to go
through all the reading prescribed before every class and make a meaningful contribution through
active class participation.

Textbook:
 Risk Management and Financial Institutions, 4e, Hull, J. C.,[Hull], Wiley, 2015

Reference Books:
 Risk Management in Banking, 4e, Bessis, J[Bessis], Wiley, 2015
 Financial Risk Management: A Practitioner’s Guide to Managing Market & Credit Risk, 2e, Allen,
 S. [Allen], Wiley, 2013
 Financial Institutions Management: A Risk Management Approach, 8e, Anthony Saunders, Marcia
Cornett, McGraw Hill-Irwin, 2014
 Financial Risk Manager Hand Book, Philippe, Jorion, Wiley-GARP

Journals:
 The Wall Street Journal, Financial Times. New York Times: Deal Book

Links to websites:
 www.garp.org
 www.prmia.org
 www.rism.org

Evaluation Scheme:
 Class Participation: 10 %
 Case Analysis (individual): 20 %
 Quiz (individual): 10 %
 Group Project*: 20 %
 End-Term Exam: 40 %
TOTAL: 100 %
*Group Project: details given after Session Plan.

Session Plan:
Session Topic (including subtopics) Learning Outcomes Pedagogical Tool1 Textbook
Chapters &
Readings
Introduction to Risk  What is financial Class Discussion Textbook
Management: Overview of risk? Chapter 1
risk management framework
 What are the broad
classes of financial
risk?
 Why risk
management is
significantly
important?
The Credit Crisis of 2007  What happened in Case: Textbook
the Crisis? The Rise and Fall of Chapter 6
Lehman Brothers.
 What went wrong? #217041-PDF-ENG
Published 2017
 Lessons from the
HBS
Crisis
The Credit Crisis of 2007 Understanding “Too Case: Textbook
Big To Fail” notion. Risk Management at Chapter 6
Lehman Brothers
2007-2008.
#IES370-PDF-ENG
Published 2013
1
 HBS
Valuation & Scenario  Assess Volatility Class Discussion Textbook
Analysis and asset prices; Chapter 7

 Differentiate Risk-
Neutral & Real-
World;
 Apply Scenario
Analysis Principles
How traders manage their Calculate and Analyze Problem solving on Textbook
risks? Delta, Gamma, Vega, MS Excel Chapter 8
Theta & Rho;
How traders manage their Evaluate Greek Class Discussion Textbook
risks? Letters. Chapter 8
Interest Rate Risk  The management of Problem solving on Textbook
net interest income; MS Excel Chapter 9

 Analyze the
implications of
Duration
Interest Rate Risk Analyze the Problem solving on Textbook
implications of MS Excel Chapter 9
Convexity
9 Volatility, Correlations and  Estimate volatility. Problem solving on Textbook
Copulas MS Excel Chapter
 Monitoring daily 10 & 11
volatility;
 Monitoring
correlation;
 Apply Copula based
Methods
10 Value at Risk (VaR)  Calculate VaR; Problem solving on Textbook
MS Excel Chapter
 Calculation of VaR 12 & 14
using historical
simulation;
 Calculation of
Volatility Adjusted
VaR
11 Value at Risk (VaR) Calculation of VaR Problem solving on Textbook
using Monte Carlo MS Excel Chapter
Simulation 14
Regulation  Analyze Banking Class Discussion Textbook
regulations Chapter
overview with 15
respect to risk
management
principles;
 Evaluate Basel I &
Basel II.
Regulation How Basel III is Class Discussion Textbook
different from Basel I Chapter
and Basel II? 16
 Credit Risk Apply the concepts Problem solving on Textbook
like MS Excel Chapter 19
 Credit ratings;
 Historical default
probabilities;
 Recovery rates;
Credit Default Swaps (CDS) Analyze the features Class Discussion Textbook
of Credit Default Chapter 19
Swaps
Stress Testing  Generating the Class Discussion Textbook
scenarios; Chapter 22

 What is the
regulation with
respect to stress
testing
Operational Risk  Defining operational Guest Lecture Textbook
risk with respect to Chapter 23
our Indian banking
system;
 Determination of
regulatory capital
for operational risk
Liquidity Risk  Analyze Liquidity Class Discussion Textbook
trading risk; Chapter 24

 Evaluate Liquidity
funding risk.
Economic Capital and  Analyze the concept Class Discussion Textbook
RAROC of Economic Capital Chapter 26

 Apply RAROC
calculations
Group Presentations Evaluate the Presentations by
comprehensive students
understanding of each
student on different
aspects of financial
risk management.

Group Project: Each participant in groups of 4 or 5 has to analyze any of the following topics related
to financial risk management:
 How a scheduled commercial bank in India manages its credit risk?
 How a scheduled commercial bank in India manages its interest rate risk?
 How a scheduled commercial bank in India manages its operational risk?
 How a scheduled commercial bank in India manages its liquidity risk?
 Explain the exposure of Indian banks when it comes to taking positions in different derivatives to
manage their different risk exposures.
 Why Indian public sector banks have been bleeding more in terms of having more bad loans in
comparison to Indian private banks?
 The report should not exceed 10 single-spaced (Times New Roman font 12pt size) pages.
Group Project (alternative): participants in groups of 4 or 5 have to research a bank of over a period
of time and against its peers, on issues discussed in this course. They have to study the bank for at
least 5 periods (years, quarters) with an eye towards:
 Interest rate risk exposures (maturity mismatches at the least)
 Market Risk Exposures (trading assets at the least)
 Credit Risk exposures (loan portfolios at the least, loan losses, non-performing loans, etc…)
 Liquidity Risk exposures
 Off-balance sheet exposures
 Capital Adequacy
 Profitability (ROA,ROE)
 Risk management (securitization, loan sales, derivatives, etc.)
 Sovereign Risk exposures (LDC loans)
 Analyze the bank’s positions over the years, and also compare it to the national aggregates, and/or
its peers.  Use at least 2-3 peers.
 Where do you see your bank going?  What are its prospects?
 Participants are welcomed to add other relevant sources of information to their analysis. However,
they must provide links and bibliographies for all sources used.
 The report should not exceed 10 single-spaced (Times New Roman font 12pt size) pages, and is
due by EoD by date TBA