Course Information

This course applies advanced mathematical techniques to the measurement, analysis, and management of risk. The focus is on financial risk. Sources of risk for financial

instruments (e.g., market risk, interest rate risk, credit risk) are analyzed; models for these risk factors are studied and the limitation, shortcomings, and compensatory techniques

are addressed. Throughout the course, the environment for risk is considered, be it

regulatory or social (e.g., Basel capital accords). A major component of the course are the Value at Risk (VaR) and Conditional VaR measures for market risk in trading operations, including approaches for calculating and aggregating (C-) VaR, testing (C-) VaR, (C-)

VaR-driven capital for market risk, and limitations of (C-) VaR-based approaches. Asset Liability Management (ALM), where liquidity risk as well as market risk can affect the   balance sheet, is studied &analyzed. Here, models for interest rate, spread, and volatility risks are applied to quantify this exposure. Another major component of the course is

credit risk. Sources of credit risk, how measured-risk is used to manage exposure, credit derivatives, techniques for measuring default exposure for a single facility (including

discriminant analysis and Merton-based simulation), portfolio risk aggregation

approaches (including covariance, actuarial, Merton-based simulation, macro-economic default model, and the macro-economic cash-flow model - for structured and project

finance). Finally, there is a brief introduction to concepts and tools that remain valid for

large and extreme price moves, including the theory of copulas and their empirical testing and calibration.

Prerequisites

The recommended prerequisite is 553.644 (Introduction to Financial Derivatives)

Course Goals

Risk is one of two pivotal axis in our financial enterprise - the other being return.  This   course establishes a setting for financial institutions (banks, insurance companies, asset   managers, etc.) and the sources of financial risk.  More directly, we apply mathematical- statistical-probabilistic modeling and analysis techniques for interest rate, credit,

liquidity, and operational risk (among others) to support meeting the solvency mandates    of central bankers and other regulatory bodies as embodied in the Basel accords and other forms of guidance.

Course Topics

By the end of this course, you will be able to:

•   Characterize the fundamental sources and manifestations of financial risk.

•   Establish metrics and measures that quantify risk.

•   Formulate models and techniques to generate the forward-looking quantification of important risk measures used to determine required risk capital

•   Synthesize an understanding of the underlying quantitative sources for regulatory risk measurement and management.

Course Expectations & Grading

It is expected that each module will take approximately 8 hours per week to complete. Here is an approximate breakdown: reading the assigned sections of the texts

(approximately 3 hours per week) as well as some outside reading; listening to the audio annotated slide presentations and/or attending online lectures (approximately 3 hours per week); and writing assignments/homework (approximately 2 hours per week).

Key Dates

Refer to Canvas

Assignments & Readings

These are posted in the Lecture Notes, in Canvas, and discussed in Lecture

Ethics

The strength of the university depends on academic and personal integrity. In this course, you must be honest and truthful. Ethical violations include cheating on exams,

plagiarism, reuse of assignments, improper use of the Internet and electronic devices,   unauthorized collaboration, alteration of graded assignments, forgery and falsification, lying, facilitating academic dishonesty, and unfair competition.

The Financial Mathematics faculty are seriously committed to ethical behavior as it is a keystone requirement in the financial industry. Accordingly, serious breaches of

academic misconduct-ethics (below) will be recommended for assigning a grade of “F” in the course.

Report any violations you witness to the instructor. You may consult the associate dean    of student conduct (or designee) by calling the Office of the Dean of Student Life at 410- 516-8208 or via email atstudentconduct@jhu.edu.

You can find more information about university misconduct policies on the web at these sites:

•   For undergraduates:https://studentaffairs.jhu.edu/policies-guidelines/undergrad- ethics/

•   For graduate students:https://homewoodgrad.jhu.edu/academics/policies/

Personal Wellbeing

•   Because of the ongoing COVID-19 pandemic special requirements maybe in effect this term, and these may vary during the term. Please keep updated

with theseat the following sites:

o University information:https://covidinfo.jhu.edu/

o Whiting School of Engineering information:

https://engineering.jhu.edu/covid-19/

•   COVID-19 vaccination a required unless an exception has been granted by the university for health or religious reasons.

•   The Johns Hopkins COVID-19 Call Center (JHCCC), which can be reached at 443-287-8500 seven days a week from 7 a.m. to 7 p.m., supports all JHU

students, faculty, and staff experiencing COVID-19 symptoms.

Primarily intended for those currently within driving distance of

Baltimore, the JHCCC will evaluate your symptoms, order testing if needed,    and conduct contact investigation for those affiliates who test positive. More

information on the JHCCC and testing is on thecoronavirus

information website.

•   If you are sick please notify me by email so that we can make appropriate

accommodations should this affect your ability to attend class, complete

assignments, or participate in assessments. TheStudent Health and Wellness        Centeris open and operational for primary care needs. If you would like to speak with amedical provider, please call 410-516-8270, and staff will determine an

appropriate course of action. See alsohttps://studentaffairs.jhu.edu/student-      life/student-outreach-support/absences-from-class/illness-note-policy/

•   All students with disabilities who require accommodations for this course should   contact me at their earliest convenience to discuss their specific needs. If you have

a documented disability, you must be registered with the JHU Office for Student

Disability Services (101 Shaffer Hall; 410-516-4720;

http://web.jhu.edu/disabilities/) to receive accommodations.

•    Students who are struggling with anxiety, stress, depression or other mental health related concerns, please consider connecting with resources through the JHU

Counseling Center. The Counseling Center will be providing services remotely to protect the health of students, staff, and communities. Please reach out to get

connected and learn about service options based on where you are living this fall at 410-516-8278 and online athttp://studentaffairs.jhu.edu/counselingcenter/.

•    Student Outreach & Support helps students manage physical and mental health

concerns, personal and family emergencies, financial issues, and other obstacles

that may arise during their college experience. Students can self-refer or refer a

friend who may need extra support or help getting connected to resources. To

connect with SOS, please visit this website:https://studentaffairs.jhu.edu/student- life/student-outreach-support/or emaildeanofstudents@jhu.edu, call 410-516-

7857, or students can schedule to meet with a Case Manager by visiting the Student Outreach & Support website and filling out a referral form online.

Classroom Climate

As your instructor, I am committed to creating a classroom environment that values the

diversity of experiences and perspectives that all students bring. Everyone here has the

right to be treated with dignity and respect. I believe fostering an inclusive climate is

important because research and my experience show that students who interact with peers who are different from themselves learn new things and experience tangible educational    outcomes. Please join me in creating a welcoming and vibrant classroom climate. Note

that you should expect to be challenged intellectually by me, the TAs, and your

peers, and at times this may feel uncomfortable. Indeed, it can be helpful to be pushed sometimes in order to learn and grow. But at no time in this learning process should

someone be singled out or treated unequally on the basis of any seen or unseen part of their identity.

If you ever have concerns in this course about harassment, discrimination, or any unequal treatment, or if you seek accommodations or resources, I invite you to share directly with me or the TAs. I promise that we will take your communication seriously and to seek

mutually acceptable resolutions and accommodations. Reporting will never impact your

course grade. You may also share concerns with the AMS Chair (Fadil Santosa,

fsantos9@jhu.edu), the Director of Graduate Studies (dan.naiman@jhu.edu), the

Assistant Dean for Diversity and Inclusion (Darlene Saporu,dsaporu@jhu.edu), or the Office of Institutional Equity ([email protected]). In handling reports, people will protect    your privacy as much as possible, but faculty and staff are required to officially report  information for some cases (e.g. sexual harassment).

Family Accommodations Policy

You are welcome to bring a family member to class on occasional days when your    responsibilities require it (for example, if emergency child care is unavailable, or for