Corporate finance and microeconomics are applied to matters of importance to commercial bankers. Among the subjects treated are bank asset portfolio construction, lending policies, liabilities management, bank capital structure, short run cash management, financial market rates and flows, and quantitative models for bank management. Commercial bank management is analyzed from an internal viewpoint in terms of what bank managers should look for in asset management and why; what market conditions they should be aware of; and what techniques they can use to meet changing economic and financial conditions.
The course is designed to provide the students with the structure of the risk management process, deeper knowledge of the financial risk management, analytical thinking and precise mathematical derivation, comprehensive core concepts of risk theory and risk management. The objective of this course is to provide students with a broad framework for evaluating all types of risk, along with conceptual tools for making risk management decisions rationally and consistently. It is intended for business students from all disciplines, including those who intend to take only one course in risk management and insurance. The course also serves as the introductory course for students wishing to pursue further studies in the field. The course focuses on the economics and science of risk and risk assessment and decision-making under uncertainty, and the methods for managing risk, including enterprise risk management (ERM). We analyze risk transfer markets in some detail, including issues of moral hazard, adverse selection, insurance pricing and the regulation of insurance markets. We will examine property and liability risks, morbidity/mortality/longevity risks common in life/health insurance markets as well as the increasing role capital markets in the transfer if risk. We also explore the rapidly changing landscape and the future of risk and risk management around the globe, from record natural disasters to cyber risks and drones to driverless vehicles, the “Sharing Economy” and the Internet of Things. The concept of systemic risk, its role in the global financial crisis and ensuing impact on financial market regulation will also be examined. In addition to learning about risk, students should find themselves challenged. The broader aim is to strengthen critical thinking ability, and grow problem solving and decision making skills.
| Week | Topics |
|---|---|
| 1 | Syllabus Review, Course Programming Decision-Making: Risk Definitions, Risk Fallacies and risk Misperceptions, The Epistemological Status of Risk,Actions, Events, States of Nature, Actions Outcomes, What is risk?, The risk management process, Enterprise risk management, Objectives of risk management (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: Pages 21-65 ) |
| 2 | Review of the Probability Theory: probability distribution, expected value, variance, standard deviation, skewness, percentile values, value at risk, correlation(Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: Pages 21-65 ) |
| 3 | The Decision-Maker’s Risk Attitude: The Utility Theory and the Risk Attitude Toward the Risk, Other Theories Regarding the Individuals Risk Attitude. Integration of the Risk Attitude into the Decision Making Process The Risk Aversion and the Attached Probability to the Risky Event. The Risk Response to the Risk: Residual Risk vs. Inherent Risk, Risk Acceptation, Risk Mitigation, Risk Sharing (Hedging and Insurance) Risk Avoidance. The Risk Response of a Group of Decision Makers vs. Risk Response of a Decision Maker. |
| 4 | Enterprise-Wide Risk Management (ERM): The Five Stage Model of ERM (Objectives Setting, Identification, Assessment and Measurement, Risk Treatment, Risk Monitoring). Risk Appetite and Risk Tolerance, The Role of Systems and Risk Officers in Risk Management Process. (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: Pages 88-102) |
| 5 | Taxonomy of Risks for Individuals and Companies: Event-Driven Risk Classification, Diversified vs. Undiversified Risk, Financial vs. Business risk. Pooling Arrangements & Diversification of Risk. Impact of pooling on expected losses. Impact of pooling on variability of losses Correlation and pooling arrangements. (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: Pages 114-123) |
| 6 | Insurance Company Operations (Rating and Rate Making, Underwriting, Production, Claim Settlement, Reinsurance, Investment, Other Insurance Company Functions) Insurance Pricing (Determinants of fair premiums, risk clasifications, adverse selection, underwriting cycle, regulations, residual markets, metrics used to assess performance) (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: from chapter 5-8, Pages 133-162) |
| 7 | Fundamental legal principles (Indemnity, Insurable Interest, Subrogation) and Analysis of Insurance Contracts (definition of insured, endorsement and riders, deductibles, coinsurance) (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition: from chapter 9-10, Page 199-230) |
| 8 | Life Insurance (Types and purpose of life insurance, life insurance, disability and retirement products chapter 11, 12, 14). Property and Liability risks (personal property and liability risks, commercial property and liability risks, chapter 29, 26). (Principles of Risk Management and Insurance by G. Rejda, M. McNamara and W. Rabel, 14th edition, page 231-236, and page 437-505) |
| 9 | Measurement/Evaluation of Risk: Qualitative Assessment/Evaluation of Risk. Measurement of Risk Quantitative Methods used to Measure the Risk, Probabilistic Approaches vs. Non-Probabilistic Approaches. |
| 10 | Management of Market Risk |
| 11 | Credit and Liquidity Risk Management |
| 12 | Management of Interest Rate Risk |
| 13 | Foreign Currency Risk: Measurement and Management |
| 14 | Management of Operational Risk |
| Method | Qty | % Each |
|---|---|---|
| Midterm Exam(s) | 1 | 30 |
| Project | 1 | 30 |
| Final Exam | 1 | 30 |
| Attendance | 10 |
Principles of Risk Management and Insurance by G. Rejda and M. McNamara, 14th Edition, Pearson Education Limited 2022 (ISBN- 13: 978-1-292-34974-9 and, eBook ISBN 13: 978-1-292-34976-3).