|The 2007 – 2009 financial crisis highlighted once again the importance of financial risk management, not only by financial institutions, but by corporations more generally. A hot discussion resurfaced on the usefulness of popular risk measures, such as Value-at-Risk and Expected Shortfall, as well as of derivative securities as proper instruments to hedge corporate financial risk. As the financial world becomes increasingly more complex and the opportunities offered by derivative instruments increase, so do the potential risks from their misunderstanding and misuse. Indeed, as the global derivatives market keeps increasing -- it reached $600 trillion (notional) in 2010, a 40% increase over tis value in 2006 -- an increasingly number of companies turn to derivatives for financial risk management purposes. A 2009 ISDA survey, for instance, finds that 95% of Fortune 500 companies actively use derivatives for risk management. Thus, it is as important as ever to be able to exploit the opportunities offered by derivative instruments, not only for proper corporate risk management, but even to gain a strategic advantage once risk management solutions are integrated with the long term corporate goals.
This course uses the case method to study the fundamentals of corporate financial risk management. The course has two main objectives. The first is to cover techniques to identify, measure and manage corporate financial risk, as modern financial markets and regulation require. Specifically, topics of discussion will include dynamic hedging and portfolio replication, the development of Value-at-Risk and Expected Shortfall, the management of exchange rate risk, interest rate risk, credit risk and operation risk. The second main objective is to build a framework to integrate financial risk management solutions with long-term corporate strategy. We will discuss cases where the use of financial engineering was vital for the success of a business strategy. Typical applications in this case include privatizations, mergers and acquisitions, and financing strategies, among others.
Study questions on each case will be assigned in preparation for the class discussion. At the beginning of each class, students submit a one- or two-page memorandum with the key points of the assigned case. Group work is encouraged, but no more than four students can be in the same group. All names have to appear on each memorandum. Individual homework will also be assigned. A good background in derivative securities and knowledge of spreadsheet programs are necessary. However, the course will focus more on the uses of derivative securities rather than their technical aspects. Hence, a preparation at the level of Business 35100 (Financial Instruments) will be sufficient to analyze the cases. More information is available on the course homepage http://faculty.chicagobooth.edu/pietro.veronesi/teaching/BUS438/35131_syllabus.pdf.
Preassignment: The assignment for the first class is detailed in the CoursePack.