Curriculum for Risk Management Course
Week # 1
Topic : Probability Calculations as Basis for Risk Management Tools and Pricing of Financial Products such as Life Insurance
Reading for the Week:
“The Ascent of Money” Niall Ferguson
-Introduction ( Darwinian Nature of Financial Products
-Chapter 4 The Return of Risk pages 176-229 ( Insurance Pricing
“Against the Gods” by Peter Bernstein
-Introduction to page-22
-Renaissance Gambler pages 39-56
-French Connection pages 60-72
-Considering Nature of Man pages 102-115
-Law of large Numbers pages 122-125
-Normal distribution pages 142-151
-Regression to the mean pages page 172-179
-Fantastic system for side bets pages 304-328
Week 1 Class outline
1.Probability in Gambling calculation
2. Probability extended to life insurance calculations and pricing
3. Law of large Numbers
4. Normal distributions –Insurance basis for casualty and property insurance
5. Regression to the mean in markets
6. Pricing models as a concept for financial products
7. Introduction to Derivatives
Week # 2
Topic: Products to Manage Risk Options and Futures and tools to evaluate risk such as Value at Risk (VAR)
Reading for the Week:
“Options,Futures,and Other Derivates” by John C Hull
-Chapter 2 Futures markets
-Chapter 11 Black Scholes Model
-Chapter 12 Options of Stock Indices, Currencies and futures
-Chapter 13 the Greek Letters
-Chapter 14 VAR Value at Risk
-Chapter 23 Credit Risk
Option Volatility & Pricing: Advanced Trading Strategies and Techniques (Hardcover) by Sheldon Natenburg
Chapters to be determined
Week 2 Class outline
1) Futures contracts
2) Options contracts
3) Delta, Vega, Theta
4) Implied volatility and pricing of options theoretical value
5) Black Scholes and other pricing models
6) Using options for hedging /trading. Current markets for selected products to be reviewed
7) Credit risk
Week # 3
Topic: High profile Failures of Risk Management Crash of -87 and LTCM collapse
Reading for the Week:
“When Genius Failed” by Rower Lowenstein
-Chapter 1 Meriwether
-Chapter 7 Bank of Volatility
-Chapter 8 The Fall
-Chapter 9 The Human Connection
-Epilogue
“Demons of our Own Design” by Richard Bookstaber
-Chapter 6 Long Term Capital Rides Leverage to Hell
-Chapter 2 Demons of ’87
Liar’s Poker” by Michael Lewis
Chapter 4 pages 54-78
Chapter 8 pages 152-184
Michael Lewis article on End of Wall Street Appendix 5
The End of Wall Street:
Interview with Michael Lewis see Appendix 1
http://business.theatlantic.com/2009/01/an_interview_with_michael_lewis.php
Week 3 Class Outline
1. LTCM background
2. Role of leverage and prime brokers
3 Volatility and liquidity
4) Collapse of LTCM
5) Crash of ‘87 and Failure of Portfolio Insurance to hedge against risk
6) End of Wall Street article from Michael Lewis Appendix 5
7) Lewis article on Credit Default swaps and problems therein Appendix 1
8) Liar’s poker discussion and role of various players (Who is you your side? No one)
Week # 4
Topic: Bubbles and the Changing Landscape of Wall Street
Reading for the Week:
Michael Lewis articles include din appendix found here:
Copied in Appendix 3:
1) Story by Michael; Lewis The Mansion-- A Subprime Parable see Appendix 3
http://www.portfolio.com/culture-lifestyle/goods/real-estate/2008/09/18/Michael-Lewis-Mansion?
Copied in Appendix 2:
2) The Formula that Killed Wall Street by Felix Lewis
3) (Appendix 4 Article by Michael Lewis on AIG
http://www.bloomberg.com/apps/news?pid=20601039&sid=atlHxXH7FweQ&refer=columnist_lewis
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
Chapter 1 The Mississippi Scheme page 1-45
Chapter 2 The South Sea Bubble page 46-88
Chapter 3 Tulipmania page 89-97
Chapter The Magnetizers page 304-345
“The Ascent of Money” by Niall Ferguson
Chapter 5 “Safe as Houses” page 253-282
Week # 4 Class Outline
1. Bubbles Tulip mania
2. Hysteria and Edmund Mesmer ( source of word: “Mesmerize”)
3.
4. Real Estate bubble and Subprime Mortgages/ Fed policy/Lewis AIG Appendix 4
5. Evolution on Wall Street to public corps from partnerships and expanded risk taking
6) Correlation formula giving rise to CDO’s Appendix 2
7) Sub Prime parable (Lewis article) (Appendix 3
8) Internet stock and tech boom and bust
Week # 5
Topic: Black Swans and Imagination about Risk
Black Swan The Impact of the Highly Improbable by NassimNicholas Taleb
Prologue-50 Black Swan definition Logic or What you don’t know
110-110 Katrina Risk, Risk Takers, scorn of the abstract
122-130 “Fat Tony” and “Dr John” Gambling with the wrong dice
136 Yogi Berra and Henri Poincare
156-159 Other than That it was Ok
200-210 “Mediocristan” to “Extremistan” seizing opportunity Positive black swans
223-224 The long tail in personal events
284 Two ways to approach Randomness
“Demons of our own Design” by Richard Bookstaber
Chapter 8 Complexity Tight Coupling and
The Outliers by Malcolm Gladwell
Pages 35-68 The 10,000 Hour Rule
Class outline
1) Black Swans defined
2) Katrina and other events outside normal distribution of probabilities
3) Wrong dice and % odds
4) Concepts of Medicristan and Extemistan
5) Seizing your own Positive Black swan
6) Approaching randomness
7) Normal accidents
8) 10,000 hour rule to create your own Black Swan
Documents from the web for handouts:
