AFIN328
Financial Risk Management
Department of Applied Finance and Actuarial Studies Faculty of Business and Economics

Unit Guide
D2 Day; Offered in Session 2, North Ryde 2012

Table of Content Table of Content General Information
Convenor and teaching staff Credit Points Prerequisites Corequisites Co-badged status Unit Description

2 3
3 3 3 3 3 3

Learning Outcomes Graduate Capabilities
Problem Solving and Research Capability Creative and Innovative Effective Communication Commitment to Continuous Learning Discipline Specific Knowledge and Skills Critical, Analytical and Integrative Thinking Engaged and Ethical Local and Global citizens Capable of Professional and Personal Judgement and Initiative

4 5
5 5 6 6 7 7 8 8

Assessment Tasks
Class Test 1 Class Test 2 Group assignment Final Examination

10
10 10 10 11

Unit Schedule Delivery and Resources Policies and Procedures
Academic Honesty Grades Grading Appeals and Final Examination Script Viewing Special Consideration Policy Student Support Student Enquiry Service Equity Support IT Help

12 13 14
14 14 14 14 15 15 15 15

Research and Practice

16

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General Information
Convenor and teaching staff
Unit Convenor: Alan Rai Email: alan.rai@mq.edu.au Phone: 9850 1169 Office: E4A 228 Consultation Hours: 1-3pm Monday Lecturer: James McCulloch Email: james.mcculloch@mq.edu.au Consultation Hours: Consultation during tutorials or via email

Credit Points
3

Prerequisites
ACCG252 or AFIN252

Corequisites
N/A

Co-badged status
This unit is not co-badged.

Unit Description
The aim of this unit is to prepare students for analytical duties a graduate is expected to carry out in a financial institution, or for research for a higher degree. On completing the unit, successful students also attain practical knowledge of how to apply and evaluate the quantitative methods covered in the unit in analysing and managing portfolios as well as the risk arising from various financial investments. In particular, students are expected to be able to: examine and find optimal investments strategies with respect to risk and return; attain an excellent knowledge of the role and characteristics of international financial markets and institutions; understand the pricing of various financial products and how they can be used for hedging; evaluate econometric models for financial variables; and acquire an extensive knowledge on the major approaches to managing market, credit and operational risks. By undertaking this unit, students have an opportunity to consolidate and extend the knowledge they attained in the first and second year finance units. Students are introduced to advanced techniques in financial markets and risk management practices with plenty of opportunities to apply them to real world data through several tutorial tasks and a written assignment.

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Learning Outcomes
At the end of this unit students will have developed the following skills: 1. Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments. 2. Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries. 3. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging. 4. Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. 5. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord.

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Graduate Capabilities
This unit provides opportunities to develop in the graduate capabilities in the following ways:

Problem Solving and Research Capability
Our graduates should be capable of researching; of analysing, and interpreting and assessing data and information in various forms; of drawing connections across fields of knowledge; and they should be able to relate their knowledge to complex situations at work or in the world, in order to diagnose and solve problems. We want them to have the confidence to take the initiative in doing so, within an awareness of their own limitations. This graduate capability is supported by: Learning Outcome Learning Outcome Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging. Learning Outcome Learning Outcome Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord. Assessment Task Assessment Task Assessment Task Assessment Task Final Examination Assignment Class Test 2 Class Test 1

Creative and Innovative
Our graduates will also be capable of creative thinking and of creating knowledge. They will be imaginative and open to experience and capable of innovation at work and in the community. We want them to be engaged in applying their critical, creative thinking. This graduate capability is supported by: Learning Outcome Learning Outcome Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk

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management and hedging. Learning Outcome Learning Outcome Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord. Assessment Task Final Examination

Effective Communication
We want to develop in our students the ability to communicate and convey their views in forms effective with different audiences. We want our graduates to take with them the capability to read, listen, question, gather and evaluate information resources in a variety of formats, assess, write clearly, speak effectively, and to use visual communication and communication technologies as appropriate. This graduate capability is supported by: Learning Outcome Learning Outcome Assessment Task Assessment Task Final Examination Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries. Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Assignment

Commitment to Continuous Learning
Our graduates will have enquiring minds and a literate curiosity which will lead them to pursue knowledge for its own sake. They will continue to pursue learning in their careers and as they participate in the world. They will be capable of reflecting on their experiences and relationships with others and the environment, learning from them, and growing - personally, professionally and socially. This graduate capability is supported by: Learning Outcome Learning Outcome Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging. Learning Evaluate econometric models for financial variables, for example with respect to

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Outcome Learning Outcome

their volatility, dependence structure and time series properties. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord.

Assessment Task

Final Examination

Discipline Specific Knowledge and Skills
Our graduates will take with them the intellectual development, depth and breadth of knowledge, scholarly understanding, and specific subject content in their chosen fields to make them competent and confident in their subject or profession. They will be able to demonstrate, where relevant, professional technical competence and meet professional standards. They will be able to articulate the structure of knowledge of their discipline, be able to adapt discipline-specific knowledge to novel situations, and be able to contribute from their discipline to inter-disciplinary solutions to problems. This graduate capability is supported by: Learning Outcome Learning Outcome Learning Outcome Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments. Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging. Learning Outcome Learning Outcome Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord. Assessment Task Assessment Task Assessment Task Assessment Task Final Examination Assignment Class Test 2 Class Test 1

Critical, Analytical and Integrative Thinking
We want our graduates to be capable of reasoning, questioning and analysing, and to integrate and synthesise learning and knowledge from a range of sources and environments; to be able to critique

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constraints, assumptions and limitations; to be able to think independently and systemically in relation to scholarly activity, in the workplace, and in the world. We want them to have a level of scientific and information technology literacy. This graduate capability is supported by: Learning Outcome Learning Outcome Learning Outcome Examine and find optimal investments strategies with respect to expected returns and risks involved and dependencies between financial instruments. Attain an excellent knowledge of the role and characteristics of international financial markets and the institutions and intermediaries. Understand the pricing of various financial products like equity, fixed income instruments or derivatives and know how these products can be used for risk management and hedging. Learning Outcome Learning Outcome Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Acquire an extensive knowledge on the major approaches to managing market, credit and operational risks and banking regulations as they are suggested in the new Basel Capital Accord. Assessment Task Assessment Task Assessment Task Assessment Task Final Examination Assignment Class Test 2 Class Test 1

Engaged and Ethical Local and Global citizens
As local citizens our graduates will be aware of indigenous perspectives and of the nation's historical context. They will be engaged with the challenges of contemporary society and with knowledge and ideas. We want our graduates to have respect for diversity, to be open-minded, sensitive to others and inclusive, and to be open to other cultures and perspectives: they should have a level of cultural literacy. Our graduates should be aware of disadvantage and social justice, and be willing to participate to help create a wiser and better society. This graduate capability is supported by: Assessment Task Assignment

Capable of Professional and Personal Judgement and Initiative
We want our graduates to have emotional intelligence and sound interpersonal skills and to demonstrate discernment and common sense in their professional and personal judgement. They will

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exercise initiative as needed. They will be capable of risk assessment, and be able to handle ambiguity and complexity, enabling them to be adaptable in diverse and changing environments. This graduate capability is supported by: Learning Outcome Assessment Task Assessment Task Assessment Task Final Examination Class Test 2 Evaluate econometric models for financial variables, for example with respect to their volatility, dependence structure and time series properties. Class Test 1

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Assessment Tasks
Task Weight Due Date Linked Learning Outcomes Class Test 1 Class Test 2 Group assignment Final Examination 55% University Examination Period 1, 2, 3, 4, 5 1, 2, 3, 4, 5, 8, 9 Final Examination 10% 10% 25% Week 4 Week 10 Week12 1, 2, 3, 4 1, 2, 3, 4, 5 1, 2, 3, 4, 5 Linked Graduate Capabilities 1, 2, 3, 8 1, 2, 3, 8 1, 2, 3, 5, 6 Class Test 1 Class Test 2 Assignment Brief Description

Class Test 1
Due Date: Week 4 Weight: 10%
Subm ission

In the lecture tim e

Extension

No extensions will be granted. Students who do not sit the test during the lecture tim e will be awarded a m ark of 0 for the task, except for cases in which an application for special consideration is m ade and approved.

Class Test 2
Due Date: Week 10 Weight: 10%
Subm ission

In the lecture time.
Extension

No extensions will be granted. Students who do not sit the test during the lecture tim e will be awarded a m ark of 0 for the task, except for cases in which an application for special consideration is m ade and approved.

Group assignment
Due Date: Week12 Weight: 25%
Subm ission

In the lecture tim e

Extension

No extensions will be granted. Students who do not com plete the assignm ent by the due date will be awarded a m ark of 0 for the

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task, except for cases in which an application for special consideration is m ade and approved.

Final Examination
Due Date: University Examination Period Weight: 55%
Exam ination conditions

What is required to com plete the unit satisfactorily

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Unit Schedule
Week 1 Topics Hull Chapter 1,2& 5 : Introduction, Risk and Return, Portfolio Construction, Banks, Financial Instruments

2 3 4 5 6 7

Hull Chapter6: How Traders Manage Their Exposure Hull Chapter7: Interest Rate Risk, Duration, Convexity 1st Semester/Hull Chapter8: Value-at-Risk Hull Chapter9: Volatility, EWMA and GARCH models Hull Chapter10: Correlations and Copulas Hull Chapter11: Regulation, Basel II, WCDR

8

Hull Chapter12&13: Market Risk VaR: Historical Simulation and Model Building Approach

9 10 11 12 13

Hull Chapter 14&15: Credit Risk-Probabilities of Default (PD), Credit VaR 2nd Semester Test/Hull Chapter16: Credit Derivatives and the Credit Crunch of 2007 Hull Chapter 17&18: Stress Testing and Operational Risk Hull Chapter 21: Economic Capital and RAROC Revision Lecture

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Delivery and Resources
Classes Classes in AFIN328 are composed of a three hour lecture. Unit materials are learnt by attending lectures and through independent learning. The lectures provide a general overview of the topics highlighting a number of concepts and techniques. Further additional reading material will be provided. Students are strongly advised to study the additional reading material provided by the unit convenor and the lecturers and further explore all relevant concepts and techniques. The timetable for classes can be found on the University web site http://www.timetables.mq.edu.au/ Required Text: Hull, J. (2010) Risk Management and Financial Institutions, 2nd Edition, International Edition, Pearson. ISBN: 978-0-13800617-4. This book can be purchased from the Macquarie University Co-op Bookshop. We will supplement the text with readings from journals and other textbooks as required. Students needing assistance with mathematics should first consult: Dowling, E.T. (1992) Introduction to Mathematical Economics, (2 nd Ed) New York: McGraw-Hill Gujarati, D. (2003) Basic Econometrics, (4th Ed), McGraw-Hill Technology Used and Required A scientific or business calculator without alphanumeric capabilities, internet access, computer with MS Excel, and DerivaGem software available on the CD obtained by purchasing the required textbook. Teaching and Learning Strategy The teaching strategy in AFIN328 recognises that students learn independently and assume responsibility for the learning process and with academic integrity. Students are expected to participate in the unit by attending lectures, reading the provided material, thoroughly revising the lecture notes and preparing answers to the provided exercise questions and reading additional material about important issues in investment and risk.

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Policies and Procedures
Macquarie University policies and procedures are accessible from Policy Central. You may find of particular interest those which can be found in the Learning and Teaching category.

Academic Honesty
The nature of scholarly endeavour, dependent as it is on the work of others, binds all members of the University community to abide by the principles of academic honesty. Its fundamental principle is that all staff and students act with integrity in the creation, development, application and use of ideas and information. This means that: all academic work claimed as original is the work of the author making the claim all academic collaborations are acknowledged academic work is not falsified in any way when the ideas of others are used, these ideas are acknowledged appropriately. Further information on the academic honesty can be found in the Macquarie University Academic Honesty Policy at http://www.mq.edu.au/policy/docs/academic_honesty/policy.html

Grades
Macquarie University uses the following grades in coursework units of study: HD - High Distinction D - Distinction CR - Credit P - Pass F - Fail Grade descriptors and other information concerning grading are contained in the Macquarie University Grading Policy which is available at: http://www.mq.edu.au/policy/docs/grading/policy.html

Grading Appeals and Final Examination Script Viewing
If, at the conclusion of the unit, you have performed below expectations, and are considering lodging an appeal of grade and/or viewing your final exam script please refer to the following website which provides information about these processes and the cut off dates in the first instance. Please read the instructions provided concerning what constitutes a valid grounds for appeal before appealing your grade. http://www.businessandeconomics.mq.edu.au/new_and_current_students/undergraduate_current_students/how_do_i/grade_appeals/

Special Consideration Policy
The University is committed to equity and fairness in all aspects of its learning and teaching. In stating this commitment, the University recognises that there may be circumstances where a student is prevented by unavoidable disruption from performing in accordance with their ability. A special consideration policy exists to support students who experience serious and unavoidable disruption such that they do not reach their usual demonstrated performance level. The policy is available at:

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http://www.mq.edu.au/policy/docs/special_consideration/policy.html

Student Support
Macquarie University provides a range of Academic Student Support Services. Details of these services can be accessed at: http://www.mq.edu.au/currentstudents/.

Student Enquiry Service
Details of these services can be accessed at http://www.student.mq.edu.au/ses/.

Equity Support
Students with a disability are encouraged to contact the Disability Support Unit who can provide appropriate help with any issues that arise during their studies.

IT Help
If you wish to receive IT help, we would be glad to assist you at http://informatics.mq.edu.au/help/. When using the university's IT, you must adhere to the Acceptable Use Policy. The policy applies to all who connect to the MQ network including students and it outlines what can be done.

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Research and Practice
This unit gives you practice in applying research findings in your assignments This unit gives you opportunities to conduct your own research

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