Course Meeting Times
Lectures: 1 session / week, 3 hours / session
Recitations: 1 session / week, 1 hour / session
Course Objective
There are many types of risk management going on in different parts of a company at the same time. The most familiar loci of risk management are trading operations and the treasury office. But many other parts of the firm are involved in risk management. The marketing department designs types of contracts for customers that share risk. Business unit managers evaluate projects with different risk characteristics, and decide on ways to alter projects so as to minimize risk without sacrificing return. The tax, legal, and accounting departments are concerned with risk, with hedging, and with the corporate governance issues. At the highest level of the company key questions about the firm’s strategy and its ability to fund its operations must be answered with an eye on the risks of each alternative and strategic decisions that can secure the greatest value for shareholders.
Each of these different risk management activities focuses on different aspects of risk management. The problem before a commodity trader is not the same problem that is before the business unit manager and not the same problem that is before the CFO. The problems facing each actor within the firm demand a focus on different risk related issues.
Prerequisites
From the corporate finance side, this course builds on material developed in 15.434, Advanced Corporate Finance. From the risk management side, this course builds on the tools and techniques developed in 15.437, Options and Futures Markets.
Course Format
The course will be taught with a mixture of lectures presenting specific tools and outline of corporate problems and case discussions in which students attempt to apply the tools and concepts. Class participation is obviously critical. Outside of class students will have the opportunity to focus on key analytic tools and problem sets. The TA will set up 5 recitation sessions to offer students a chance to discuss the 4 problem sets. Students should read the relevant materials before the class covering those topics.
Grading
The course is offered only on a Pass/Fail basis. A passing grade is earned by (1) attendance, (2) general class participation, especially in the case analysis, and (3) obvious effort and accomplishment in mastering the basic tools, including the problem sets. Engagement is the key. The learning is a collective process accomplished with involvement on the part of all.
Additional References
Good textbooks to utilize as backup references are:
Brealey, Richard, Stewart Myers, and Franklin Allen. Principles of Corporate Finance. 9th ed. New York, NY: McGraw Hill Higher Education, 2007. ISBN: 9780071266758.
Grinblatt, Mark, and Sheridan Titman. Financial Markets and Corporate Strategy. Boston, MA: McGraw-Hill Irwin, 2001. ISBN: 9780072294330.
McDonald, Robert. Derivatives Markets. Boston, MA: Addison-Wesley, 2005. ISBN: 9780321280305.
Hull, John. Options, Futures, and Other Derivatives. 7th ed. Upper Saddle River, NJ: Prentice Hall, 2008. ISBN: 9780136015864.
Topic Outline
The course will be organized according to the following outline of topics. Due to the short nature of the course, the depth into which each is explored will vary greatly. However, the outline is very useful for organizing the thinking about the place of risk management in the firm’s business.
The Role of Risk Management
- How companies manage risk
- Why companies manage risk
- Where companies trade risk
The Tools of Risk Management
- Measuring risk
- Packaging risk
- Pricing risk
The Business of Risk Management
- Valuation and pricing
- Asset management
- Trading operations
- Transaction hedging
- Liability management
- Financial policy and strategic hedging
- Taxes
The Risk Management Function
- Accounting
- Organization, governance and control
Calendar
The calendar below provides information on the course’s lecture (L) and recitation (R) sessions.
| SES # | TOPICS |
|---|---|
| L1 |
Hour 1: Introduction: the role of risk management; how companies manage risk; why companies manage risk Hour 2: Case discussion Hour 3: Measuring risk, part A: exposure |
| R1 | Assistance with problem set 1 |
| L2 |
Hour 1: Measuring risk, part B: dynamic models Hour 2: Case discussion Hour 3: Pricing risk |
| R2 | Turn in and review problem set 1 |
| R3 | Turn in and review problem set 2 |
| L3 |
Hour 1: Valuation Hour 2: Case discussion Hour 3: Trading operations |
| R4 | Turn in and review problem set 3 |
| L4 |
Hour 1: Financial policy, and liability management Hour 2: Case discussion Hour 3: Strategic hedging |
| R5 | Turn in and review problem set 4 |
| L5 |
Hour 1: Case discussion Hour 2: Governance and control Hour 3: Feedback and student evaluations |
