Lecture 1. Financial Risk What are the financial risks? Why do we care about it? Market Risk, Credit Risk, Operational Risk, Reputation Risk, Liquidity Risk, Systemic Risk, Model Risk. Financial Markets: Stock Prices, Bond Prices, Currency Exchange Rates, Commodity Prices Lecture 2. Portfolio Portfolio is to make a "suitable" combination of assets. Portfolio Diversification and Optimizations. Mean-Variance Approach. By combination, one can minimize the variance of rate of return of the portfolio. Lecture 3. Interest rates Interest rates. Bonds and Coupons. Term Structures of Yields and Interest rates. Interest rates derivatives: Caps and Floors. Credit and Credit ranking. Defaults. Currency Derivatives (foreign interest rates). Lecture 4 Development of Derivatives Development of Variable Financial. Derivatives along with Regulatory changes of Markets and increased trading volumes. Options on Future (Futures Option). Swaptions, Forward Starting Swap Structures Bonds. Exotics (Exotic Derivatives to take care of unwanted stochastic move/events). Lecture 5. Securitization Ordinary Securitization. Securitization Square. What went wrong with OTD business model. Synthetic CDS. Regulations Lecture 6. Financial Crisis Crisis Events. (1) Black Monday 1987 == Portfolio Insurance (2) FRB shock 1994== Market Risk (?) (3) Bankers Trust 1994 (--1998) ==Reputational Risk (4) Barings 1995 == Operational Risk (5) LTCM 1998 == Liquidity Risk (?) (6) Lehmann Shock 2007-2009 == Systemic Risk Subprime Housing Loans. Credit rating Company Regulations (Basel accords) == Regulatory Capitals.== Regulatory Arbitrage Excercises: 1. Introduction: data, estimation, probability distributions and their tails. 2. Covariance, correlation, sum of random variables. 3. Mean and the variance of a portfolio, decomposition of the variance: simple linear regression 4. Calculation of the options prices 5. Sequences of random variables, autocorrelation.
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