Home page of Business 35131. Prof. Pietro Veronesi

Cases in Financial Risk Management

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Course Overview

This elective course covers the foundations of modern corporate financial risk management. The traditional view of financial risk management allocates risks in categories and looks at the methodologies to measure and manage such risks. The modern view of corporate financial risk management integrates financial risk management solutions with long term corporate goals. How does financial risk management create value for the corporation? What are the costs? When is it optimal to engage in financial risk management and when is it best to actually not do it? Indeed, under perfect capital markets, financial risk management does not create value. Yet, evidence shows 95% of Fortune 500 firms and over 60% of all non-financial firms actively use derivatives to manage financial risk. What are the market frictions that make financial risk management a strategic tool to achieve long-term corporate goals?

This course uses a mix of lectures and case studies to provide students with a thorough understanding of the benefits and costs of corporate financial risk management. We cover both financial institutions and non-financial institutions and discuss a wide range of topics, including (i) the analysis of market risk (i.e. FX risk, interest rate risk, commodity risk etc ), credit risk, and liquidity risk; (ii) measures of financial risk, such as Value at Risk, Cash-flow at Risk, Credit at Risk, Liquidity VaR, Expected Shortfall, Backtesting, as well as their pros and cons; (iii) optimal hedging and insurance through financial derivatives, such options, futures, and credit derivatives; (iv) the benefits and costs of financial risk management , through derivatives and diversification; (v) the logic behind enterprise-wide financial risk management systems and their relations to long-term corporate strategy; (vi) strategic financial risk management and financial innovation. The use of numerous case studies will help cement the topics covered, as well as provide elements of class discussion.

At the end of the course, students will be comfortable with the costs and benefits of corporate 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 in investment banking, sales and trading, financial risk management, corporate treasury, as well as consulting.

In terms of requirements, students should familiar with topics covered in investments (35000) and corporation finance (35200). A good knowledge and understanding of derivatives and derivative pricing will be useful, but not strictly required. 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. The course is analytical in nature and therefore requires familiarity with calculus, statistics and probability.

Note: Financial Instruments (Bus 35100), Fixed income Asset Pricing (Bus 35130), and Advanced Models of Option Pricing and Credit Risk (Bus 35132) are not prerequisites for this course.

To know more about the course, you can download a PDF file with the Course Syllabus

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The Teaching Notes;
The Excel Files;
The Assignments;
Data ;

You can contact me by sending your mail at pietro.veronesi@ChicagoBooth.edu