Instructor: Dr. Juan R. Castro
Office: LH 102
Phone: (903) 233-3396
Office Hours: MW: 9:20 – 10:15. 11:20-12:15
or by appointment.
CHECK the Class BLACKBOARD: http://online.letu.edu for updated information about the class.
Web Site: www.letu.edu/people/juancastro
CREDIT RISK MEASUREMENT -New approaches to Value at Risk and other Paradigms,
By Saunders and Allen
Suggested Readings: Businessweek, Economist, Wall Street Journal, Financial Times, or any Money
Section from newspapers.
Reference books on reserve: Investments 5ed, Bodie, Kane, and Marcus,
Investments, by Jacob and Pettit.
Principles of Risk Management and Insurance, by Rejda
Risk Management and Insurance, by Hoyt and others
Options, Futures, and other Derivatives, by Hull.
Financial Derivatives, by Kolb
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 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 risk management theory to enhance the risk-return profile of large financial
• Examine recent developments in the theory and practice of 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 10% September 26, 2002
Exam-2 10% October 31, 2002
Exam-3 10% December 3, 2002
Financial Cases and presentations 15%
Homework, Assignments, and Quizzes 10%
Final Exam 20%
Research paper and presentation 15%
Simulation game and stock index creation 5%
Attendance and professionalism 5%
NOTES ON GRADING
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.
Professionalism: this is my evaluation of your class participation, plus your contribution to making the class a productive
learning environment. For example, your regular class preparation, and your in-class conduct are all factors of
professional conduct. Active participation and courtesy in class are important. Your questions, answers, relevant remarks,
and other participative and supportive activities are welcome and should demonstrate your knowledge and encourage
information and attitudinal exchange, as well as promote a creative atmosphere in the class conducive to learning
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, INTERNET 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: 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
Quality of the case analysis, conclusions and recommendations.
Quality of presentation.
Completeness, additional sources, and relevant information used.
Peer evaluation of team members
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.
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 1 and 3 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.
EXPECTATIONS FOR WRITTEN ASSIGNMENTS and PRESENTATIONS
Substance: You should substantiate what you are trying to convey with facts and data. The decision-maker will not
make the decision because you think is a good concept. Rather, you will need to convince the reader by providing hard
facts and data with appropriate citations. Your rationale and reasoning should be explained logically and clearly.
Style: The style of your case reports should be clear, concise, and to the point. The executive reading the report does not
want to be entertained. He or she wants the information necessary to make a decision. Avoid flowery language with lots
of adjectives and adverbs. Be specific and concise in your conclusions.
Financial Planner: you should assume that you are a financial planner or financial analyst consultant when
providing your analysis and recommendations to the class.
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.
Topics for Research
1. 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.
2. 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
3. Brokerage Companies, Investment institutions, and financial services provided in the area
Make a thorough analysis of the function of investments and financial services in the Longview area (at least
5 of them) 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.
INVESTMENT SIMULATION GAME and STOCK INDEX CREATION
We will be playing an investment simulation game, called STOCK-TRAK, for the entire semester. More than 40,000
students and 700 finance professors use this simulation game every year. Every student is going to manage an account
using several stocks. The initial investment amount will be of $500,000 which can be invested. Each student will play at
least once a week by investing in different chosen stocks. The trading period will begin on September 14, 2001 and end
on December 01, 2001. I will provide more details in class.
Each student will create the third day of class (September 03) a stock index with 10 stocks of his/her preference. Indexes
are passive strategies used to eliminate the risk of active stock trading. The student will compare his/her index in the
midterm (October 15) with the performance of the S&P 500 and will change the stock allocations accordingly to improve
the performance of his/her index.
BONUSES: 2 extra final points for the winner of the simulation game and indexes
1 extra final point for the second place of the simulation game indexes
SCHEDULE FOR CHAPTERS, QUIZZES, ASSIGMENTS, RESEARCH, AND PRESENTATIONS
TH.29/August T.3 TH.5 T.10 TH.12
Introduction to Risk Introduction to Risk Review of Statistics Review of Statistics: Utility and Risk
Problems: Problems: Problems: Problems: Problems:
Case: Case: 3. Mortgage Cases: Cases:
1. Home Equity 2. Early Retirement 4. Mortgage 5. Avoiding Taxes 7. Mutual Fund Exp
Loan 6. Index or Man 8. Passive Investing
T.17 TH.19 T.24 TH.26 T.1/October
Utility and Risk Insurance: Insurance: EXAM 1 Mutual Funds:
Problems: Problems: Problems: Problems:
Cases: Cases: Cases: Cases:
9. Refinance 11. Power of Attorn. 13. Technology Stoc 15. Social Security
1. Teachers’ Inc 12. Financial Plan 14. Refinancing 16. Unemployed
TH. 3 T.8 TH.10 T.15 TH. 17 fma
Mutual Funds: Mutual Funds: Beta and Security Introduction to Research Plan
Problems: Problems: Risk Options Due:
Problems: 1. Abstract
Research Class 2. Introduction
Cases: Cases: Cases: Discussion 3. Literature
17. WTC Attacks 19. Inlation-2 21. Life Insurance Review
18. Inflation 20. Health care cost 22. Mutual Funds 4. How data will be
T.22 TH.24 T.29 TH.31 T.5 /November
BREAK Options and Greeks Options and Hedging EXAM 2 VAR
NO-CLASSES Problems: Problems: Paper:
Cases: 25. Mortgage Rates Cases:
23. Down payment 26. Future Investm 27. Social security
24. Interest Comp 28. Investing Mon
TH.7 T.12 TH.14 T.19 TH.21
Individual Loan Risk CREDIT RISK: CREDIT RISK CREDIT RISK CREDIT RISK
Problems: Problems: Problems:
Cases: Class discussion about
29. Mutual Funds Cases: data analysis, results, Cases: Cases:
30. Pension Funds 31. Changing Mutua and conclusions. 33. 401K and 403b 35. Retirement
32. Early Retirement 34. Inheritance 36. Capital Gains
T.26 Th.28 T.3/December TH.5/December T.10
(Thanksgiving) FINAL EXAMS
CREDIT RISK: EXAM 3 Papers due and (12/9 – 12/12)
37. Stocks for gran
38. Credit Card D
TOPICS TO COVER
1. Introduction to Risk Niehaus (PP) (Chpts 1-2)and FIM Saunders (pp) (Chapter 7)
2. Review of Statistics and risk pooling ( Niehaus = chapter 3)
3. Utility and Risk (Risk aversion, etc) Niehaus = Chapter 7) (Dohorty = Chapter 2)
4. Insurance ( Niehaus = Chapter 4 and 6)
5. Mutual Funds (Ponzen = 1-2), (Bodie 7-8)
6. Beta and Security Risk (Bodie = 9)
7. Options, Hedging, and Greeks ( Hull and Strong)
8. VAR (Jorion)
9. Credit Risk
a. Individual Loan Risk ( FMI Saunders=11)
b. New Models to measure Credit Risk (CREDIT RISK MEASUREMENT Textbook)