Unit 1: Statistical foundations (Ch 22.1, lecture notes)

o General concepts of risk and uncertainty

o Risk measures (dispersion based vs. quantile based) and their properties

o Methods to compute VaR under normality or using the empirical sample distribution

o Extension to the multivariate case

Unit 2: Economic foundations (Ch. 21-22, lecture notes)

o Why is hedging relevant? How does hedging compare to the MM-world?

o Main focus on financial distress costs

o Managing systematic vs. unsystematic risk

o Valuation of corporate debt considering total risk: concept of credit ratings and PDs

o Maintaining locally optimal costs of capital: ROEC and RORAC

Unit 3: Credit risk (lecture notes)

o Probabilistic credit risk models: univariate case

o Probabilistic credit risk models: multivariate case

o Single-factor model and connection to CAPM/market model

o Credit VaR: simulation with given parameters, calibration to observable data

Unit 4: Interest rate risk (Ch. 23, lecture notes)

o Measures of interest rate risk (duration, PV01)

o Basics of asset-liability-management

o Debt financing decision: fixed or floating?

Unit 5: FX risk (Ch 22.2, lecture notes)

o Foundations of FX markets (institutions, structure, instruments, quotation)

o Economic determinants of FX rates

o Measuring FX risk

o Hedging FX risk with forwards and options

After completing the course, students will understand

· The statistical properties and economic foundations of important risk measures

· How to compute important risk measures based on market data

· How to connect risk management and hedging to the Modigliani-Miller model

· The concept of credit ratings and default probabilities to measure credit risk

· How to compute and how to apply measures of interest rate risk

· How to compute and how to apply measures of FX risk

Participation is compulsory in the interactive part. There are grade related performance assessments in each interactive unit. It is not possible to get points for those assessments if you are not present. Note that students may still pass the course if they are absent in the interactive sessions once only. However, students will fail the course if they are absent in the interactive sessions twice or more.

The components for the grades are weighted as follows:

• 40% final exam
• 60% interactive part

Final exam: The exam for this course is in BYOD (Bring Your Own Device) format, i.e. an in-person exam that will be conducted on Learn in the exam room. You need to be present in the exam room on campus and may NOT access the online exam environment from a place of your choice.

Please check your LPIS account a few days before the exam to find out your exam room and bring a personal ID for the attendance check. You need to bring your own device and ensure it has sufficient battery. Please also check that you can connect to the WU WLAN system. There are no power jacks available during the exam! We do NOT provide laptops or other devices that you may use to access the online exam environment! The exam will last for 60 minutes with a preparation time of 30 minutes before the exam starts. It is crucial that you arrive on time to complete all necessary preparation steps. Please note that automated exam supervision will be active during the exam.

The question format is single choice, i.e. only one correct solution to each question. The order of questions is reshuffled for each student. You need to complete a question before you can move on to the next one. After completing a question, you cannot go back and change the answer.

The allowed resources/utilities are as follows: The exam is open book. You may use your personal notes and course materials. Also ChatGPT may be used. However, any form of communication with other people in- or outside the exam room, i.e. using chats, shared drives etc. is strictly prohibited.

Interactive part: Students have to prepare mini-cases for the weekly sessions. Before a specific deadline for each interactive unit, students have to complete an assignment by answering true-false questions that indicate which problems they have solved and by uploading their solutions. Each example will be presented by a randomly selected student who checked this problem. Students need to solve a minimum number of mini-cases to pass the course. The baseline number of mini-cases and the minimum number to pass will be communicated before the start of the interactive part, e.g., a baseline of 27 mini-cases with a minimum of 19 mini-cases to pass. Note, the baseline number serves as a reference, there can be more but never less mini-cases than indicated by this number.

The presentation of mini-cases will be evaluated. Students need to be able to solve the mini-cases they present and explain their reasoning. A negative assessment of a student's presentation reduces the number of checked mini-cases. The precise deduction for such a fail will again be communicated before the start of the interactive part, e.g., a deduction of 6 mini-cases. The same deduction applies if a student indicates mini-cases he/she did not solve.

For example: If a student checks 27 mini-cases overall and fails one presentation, the number of checked mini-cases is reduced to 21. Note that two failed presentations will always lead to a number of checked mini-cases that is below the necessary minimum number and, thus, the student fails the course.

Students need to be admitted to the specialization Finance: Markets, Institutions & Instruments and need to have completed Course I and Course II successfully to register for the course.

Please log in with your WU account to use all functionalities of read!t. For off-campus access to our licensed electronic resources, remember to activate your VPN connection connection. In case you encounter any technical problems or have questions regarding read!t, please feel free to contact the library at readinglists@wu.ac.at.

Basic knowledge of Excel or R, basics in Statistics

stefan.pichler@wu.ac.at