syllabus_RISK MANAGEMENT BFIN3203 Fall 2006.doc.doc
FINANCIAL RISK MANAGEMENT
Instructor: Dr. Juan R. Castro
Office: LH 102
Phone: (903) 233-3624
Office Hours: Monday : 9:30 – 10:25. 11:30-12:00; Wednesday: 11:20- 12:25
or by appointment.
CHECK the Class BLACKBOARD: http://online.letu.edu for updated information about the class.
Web Site: www.letu.edu/people/juancastro
Required Textbook: Financial Institutions Management, A Risk Management Approach,
McGraw-Hill Irwin, 5th Edition, Saunders-Cornett. ISBN: 0-07-295746-8
Suggested Readings: Businessweek, Economist, Wall Street Journal, Financial Times, or any Money
Section from newspapers.
The course aims to provide a sound understanding of the basic principles of risk management. The primary emphasis will
be on measuring and managing different kinds of risks that modern enterprises face through their financial operations.
The course will cover various areas of management risk such as insurance, diversification, mutual funds, derivatives,
value at risk, market risk, and credit risk. The course will use quantitative analysis to study new risk models. The course
offers an integrated approach to financial risk management by combining concepts and tools from the insurance and
financial risk management disciplines. Besides examining traditional hedging strategies, techniques such as leveraging,
post-loss financing, new models in credit risk are also considered.
• Introduce students to the nature and role of financial risk management.
• Familiarize students with the corporate risk management process.
• To acquire a clear and thorough understanding of how modern corporations hedge and insure the risks faced
through their operations.
• Apply recent techniques from the financial risk management theory to enhance the risk-return profile of large
• Examine recent developments in the theory and practice of financial risk management.
• To prepare students to analyze financial cases in personal risk management
• To integrate risk management and Christian faith with eternal truth as a background.
ATTENDANCE, EXTRA ANNOUNCEMENTS & PARTICIPATION
I will be checking attendance either at the beginning or the end of the class.
Students are responsible for any extra assignment or announcement given in class and in the Blackboard. I may also
cover some chapters faster than others to accommodate the student’s need. The exam dates and schedule presented are
Exam-1 20% September 26, 2006
Exam-2 20% November 02, 2006
Exam-3 20% November 30, 2006
Final Comprehensive Exam* (60% optional)
Research paper, presentation, banking conference 15%
Basel Accord Report and Presentation 10%
Cases, quizzes assignments, and presentations 10%
NOTES ON GRADING
• Final exam is comprehensive and will be optional. Students are strongly encouraged to take the final comprehensive in order
to improve their grades. The weight of the final exam will be 60 percent and it will replace the grade of the average of the
three partial exams. Students will get the higher of both scores, so students will not be penalized if they get a lower score by
taking the final exam.
Attendance: If you miss a class, 1 point will be deducted from your overall grade. Missing 5 classes will result in a
total loss of your attendance grade points. In order to get the credit for attendance, student must be on time, not late,
and stay for the entire duration of the class. If you come late or leave earlier, it will be counted as absent. Every time a
student leaves the classroom while the class is in session, one point from attendance will be deducted. . Turn-off your
cell phone since ringing while in class will be considered not professional and one point will be deducted every times it
happens. Make sure your sitting posture is correct and never, for any reason, put your feet on the table.
There will be three partial exams and a final exam during the course as scheduled on the syllabus. These exams will test
your ability to apply your knowledge of the concepts covered during the course. There will be no make-up exams. If you
miss the partial exam for any personal (health) reasons and after proper documentation are presented, the partial exam
weight will be added to the final comprehensive. Since you are provided with the exam dates, there is no excuse for you
to allocate personal issues at the same time.
I will be in my office hours listed on the first page most of the time. If these hours are not convenient with you, I will be
happy to schedule an appointment at a mutually convenient time. I encourage you to come by whenever you have a
question about the course material or any other questions that I may be able to help you with.
I am here to help you in anyway possible. Please don’t hesitate to come by my office with any questions or concerns you
• 90 - 100 = A
• 80 - 89 = B
• 70 - 79 = C
• 60 - 69 = D
• Below 59 =F
GROUP CASES, ASSIGNMENTS, WEB EXERCISES AND PRESENTATIONS,
The goal of group cases, internet exercises, assignments, and group presentations are to develop your skills in analyzing
personal financial issues, finding relevant information, suggesting solutions, and communicating them, in a professional
manner, to the class. Groups of up to 2 students will be created and selected by the students. Cases will be provided in
advance to the groups according to the syllabus. The presenting group analyzes the case, prepares
solutions/recommendations, and plans and runs a class discussion of this case. Time allocation: 7-10 minutes.
After having the class discuss the problem, the group presents and explains, in a professional manner, its own solutions/
recommendations. Do not complicate your analysis with irrelevant information. When possible it is strongly
recommended that you use visual aids such as internet, power points, and transparencies for your presentations. Attire:
casual. Provide a copy (by e-mail) of your group case to the instructor with at least 10 hours in advance before the
presentation date. Any late case, (within 10 hour), will be penalized by lowering its grade accordingly.
DUE TO THE NATURE OF CASE STUDIES, CASE PAPERS AFTER THE PRESENTATION DUE DATE WILL
NOT BE ACCEPTED, EARNING NO POINTS. ONLY STUDENTS PRESENTING WILL BE GIVEN THEIR
Note: Questions from the cases may appear in the exams. It is recommended that every student create a folder with all
the cases, handouts, and assignments to be prepared for the exams.
Financial Planner: you should assume that you are a financial planner or a financial analyst consultant when
providing your analysis and recommendations to the class.
APPLICATIONS: MINICASES, CASES, ASSIGNMENTS, AND PRESENTATIONS
Reports: The analysis should not simply restate the facts in the case, but instead should take our understanding of what is
happening in the case to a higher level. Demonstration of a high level of understanding requires application of the
various concepts and models to that bring greater clarity to the situation in the case. It also requires that you research
other sources to get a better perspective of the problem.
Format for case analyses: Written case analyses must be between 2 and 4 pages (double-spaced, 12 point times new
roman font, 1.0 inch right and left margins and 1 inch top and bottom margins). The cover page should include the name
of the case study, the date, the course name, the section, the group name, and the names of all students in the group.
The presentations should illustrate an understanding of the case and demonstrate your ability to apply concepts, theories,
and models from your readings and previous courses. I am looking for evidence that you have learned the concepts and
have begun to learn how to apply them. I recommend using the Internet and visual aids for your presentations.
BASEL ACCORD REPORT
The BIS Basel International Bank Capital Accord is a new accord among the banking industries in most countries seeking
to establish capital requirements for credit risk. The assignment is to research and report about the different accords, (BIS
I, BIS II, and new accord) established since 1988. The student is expected to provide a detailed report and explanation of:
(1) the basic standardized model, (2) the internal ratings-based (IRB) models, (3)the advanced internal ratings-based
model. The student is expected to understand and explain the variables for the IRB approach such as probability of
default (PD), exposure at default (EAD), loss given default (LGD), credit risk migration estimates, and any default and
risk component associated with the IRB. Compare the IRB with the advanced IRB, including the RWA (risk weighted
asset) and credit risk plus. Make sure that tables and equations are fully explained. The instructor may ask students to
present this report in class.
The research will consist of selecting one of two possible options:
(1). Bank and Financial Consultant Analysis
The objective of the research analysis is to provide applied educational experiences to students by investigating how to
analyze financially a company and find the market demand for consultants in the Longview area. Students are expected to
gain foundations in understanding how financial institutions work and what is the demand of financial consultants in the
market. The students are expected to fully analyze the company to find out what is the financial condition of the
company. If possible, the students will have to obtain relevant information of the company such as financial statements
(balance sheet, income statement, and cash flows), historical stock prices, debt, liquidity, and any other relevant
information. The students will also interview the presidents of 5 financial institutions and investigate the products and
financial conditions of the companies. Students who are assigned to find out the market demand for consultants will have
to do some statistical analyzes and will be required to make forecasting for the market. Students will create groups of up
to 3 students to work in the research paper.
A. Banks and Consumers
Make a thorough analysis of the function of a typical bank and survey the number of banks in the Longview
area (at least 5 banks) the type of services they provide, the capitalization, loan risk management, and how they
attract consumers. Find the financial condition by using financial statements and ratios.
B. What is the market demand for financial consultants in the Longview area?
Research the percentage of the population, income levels, level of financial education, retirement concerns,
responsiveness to services, willingness to pay (how much), age brackets, etc. Do a survey and complete
(2) Quantitative paper
New Approaches to Credit Risk Measurement: the student will survey and understand new credit risk measurements
such as KVM, Moody’s models, KPMG’s, VAR, CrediMetrics, Mortality models, Credit Risk plus models, and
RAROC. The student will find examples of how all these credit risk models are used by financial institutions. The
student must be able to explain the components of each model and have an excellent understanding of how they
work. In reality, what is expected is that the student will create a literature review of all these models. A minimum of
25 pages is required.
Under LU policies if dishonest behavior is discovered, the professor is expected to assign the stiffest penalties for such a
behavior. The following policy states:
Academic dishonesty is a serious breach of trust within the LeTourneau University community because it violates the
regard of truth essential to genuine learning and Christian consistency. From a broader perspective, it hurts all students
and their peers who try to do their work with integrity and therefore should not be tolerated amongst peers.
Academic dishonesty is not qualitatively different from other types of dishonesty. It consists of misrepresentation in an
attempt to deceive. In an academic setting, this may take any number of forms such as:
1. Copying or using unauthorized aids in tests, examinations, or laboratory reports.
2. Plagiarism, the submissions of work done by someone else as if were one’s own.
3. Use of files, tests, problems, or other lab reports from previous classes other than allowed by the
4. Looking at an examination paper or answer sheet of another student.
5. Obtaining, prior to the administration of the test, unauthorized information regarding the test.
6. Possessing or distributing a test or other assignment material prior to its administration
7. Cooperating or aiding in any of the above.
It is the responsibility of the faculty member to determine an appropriate response to various forms of cheating.
God has created each person with unique talents, gifts and passions that He seeks for them to discover, develop and use for His Glory. This
• Discovering who God has created you to be.
• Discovering what God has called you to do, individually and corporately.
• Discovering how to prepare for as well as practice your calling.
Knowledge Outcome – Students should seek to discover God’s design and purpose in all dimensions of their lives.
Behavior Outcome – Students should seek to fulfill and glorify God’s design for them in all dimensions of their lives.
Christian leadership requires an unreserved commitment to God and His purposes in this world, a confidence in the gospel truth and a devotion to
faith, hope and love. Individuals who are deeply grounded in the Christian faith are:
• Willing to give expecting nothing in return.
• Willing to sacrifice personal gain for truth.
• Willing to forgo monetary success to pursue God’s calling on their lives.
Knowledge Outcome – Students should be well-grounded in the Scripture, the Christian faith (including ethics) and our common Christian heritage.
Behavior Outcome – Students should know, practice and articulate the Christian faith and ethics.
Engaging the world to make a difference requires an understanding of the world. This understanding comes through:
• Broadening your exposure and knowledge of various cultures and worldviews.
• Broadening your knowledge of history, your understanding of the present and your imagination for the future.
• Broadening your ability to effectively communicate to a dynamic and changing world.
Knowledge Outcome – Students should be broadly educated in foundational concepts which enhance life and learning for success in the global
Behavior Outcome – Students should communicate, integrate and use their knowledge of foundational concepts from the perspective of the
The deepening of professional and leadership skills enable students to excel in the marketplace to engage society to facilitate transformational
change. This includes:
• Deepening your degree of competence in a chosen field f study.
• Deepening your critical thinking and analytical skills that empower you to take calculated risks.
• Deepening the integration between your faith and your field of study.
Knowledge Outcome – Students should be proficient in at least one specialized field of study.
Behavior Outcome – Students should integrate, apply and communicate their knowledge of their field of study (including appropriate technologies)
from a Christian worldview.
Effective participation in communities requires students to learn to work well with a variety of people in a variety of contexts, to envision, initiate
and lead profound change whether at home, at church, in the workplace, within the community, or across the world. Practicing collaborative
• Understanding your giftedness and how to work effectively in the community.
• Meeting specific needs of communities through conscientious and committed action.
• Seeking to give all you are for a cause much greater than yourself.
Knowledge Outcome – Students should have the knowledge for effective participation in communities.
Behavior Outcome – Students should practice interpersonal and collaborative skills as responsible members of their communities.
TENTATIVE SCHEDULE FOR CHAPTERS, QUIZZES, ASSIGMENTS, AND PRESENTATIONS
T.5 TH.7 T.12 TH.14 T.19
CHAPTER-3 CHAPTERS 6 y 7
-Insurance CHAPTER-8 CHAPTER-8 CHAPTER-9
Companies (Chapter 6) Risk of Financial -Interest Rate I -Interest Rate II
Hmwk: Web Hmwk: Web Intermediaries
Questions, Questions and
S&PQuestions Standard and Poor
2. Avoiding Taxes 3. Mutual Fund
Credit Scoring Credit Scoring 1. Mortgage
TH.21 T.26 TH.28 T.3 -October TH.5 -October
CHAPTER-9 EXAM 1 CHAPTER-10 CHAPTER-10 CHAPTER-11
Interest Rate II Market Risk Market Risk -Credit Risk,
(Chapter 3-9) Risk
Case assignments 7. Technology
4. Refinance 6. Financial Plan
5. Home Equity Stock
T. 10 TH.12 T.17 TH.19 T. 24
Financial CHAPTER-12 MID-SEMESTER
CHAPTER-11 Management - Credit Risk -Credit Risk BREAK
- Credit Risk Loan Portfolio and
Conference Loan Portfolio and NO-CLASSES
Individual Loan Concentration Risk Concentration Risk
Risk Paper Report:
BASEL II Accord 9. Health care cost
8. Refinancing Report due 10. Life Insurance
T.26 TH.26 T.31 TH.2 -Nov T.7 /November
CHAPTER-16 CHAPTER-16 Study Guide for EXAM 2 CHAPTER-17
-Sovereign Risk -Sovereign Risk Exam 2 Provided (Chapters 10, 11, - Liquidity Risk
12, and 16)
11. Down payment Case assignments 13. Social security
12. Interest Comp
TH.9 T.14 TH.16 T.21 TH.23
CHAPTER-17 CHAPTER-19 CHAPTER-20 CHAPTER-20 Thanksgiving
-Liquidity Risk -Deposit Insurance -Capital Adequacy -Capital Adequacy Holiday
and Other Liabilities
14. Investing Money 16. Credit Card Debt
15. Early Retirement
T.28 -November Th.30 T.5 TH.7
Invited Speaker EXAM 3 Paper Presentation Paper Presentation (12/11-12/14
(Chapters 17, 19, and Final Exam: