This course applies advanced mathematical techniques to the measurement, analysis, and management of risk. The focus is on financial risk. Sources of risk for financial instruments (e.g., market risk, interest rate risk, credit risk) are analyzed; models for these risk factors are studied and the limitation, shortcomings, and compensatory techniques are addressed. Throughout the course, the environment for risk is considered, be it regulatory or social (e.g., Basel capital accords). A major component of the course are the Value at Risk (VaR) and Conditional VaR measures for market risk in trading operations, including approaches for calculating and aggregating VaR, testing VaR, VaR-driven capital for market risk, and limitations of the VaR-based approach. Asset Liability Management (ALM), where liquidity risk as well as market risk can affect the balance sheet, is analyzed. Here, models for interest rate, spread, and volatility risks are applied to quantify this exposure. Another major component of the course is credit risk. Sources of credit risk, how measured risk is used to manage exposure, credit derivatives, techniques for measuring default exposure for a single facility (including discriminant analysis and Mertonbased simulation), portfolio risk aggregation approaches (including covariance, actuarial, Merton-based simulation, macro-economic default model, and the macro-economic cashflow model - for structured and project finance). Finally, there is a brief introduction to concepts and tools that remain valid for large and extreme price moves, including the theory of copulas and their empirical testing and calibration. Course Note(s): This course is the same as EN.553.646 offered through the full-time Applied Mathematics & Statistics department for the residence Master of Science in Engineering in Financial Mathematics.
The course materials are divided into modules which can be accessed by clicking Course Modules on the left menu. A module will have several sections including the overview, content, readings, discussions, and assignments. You are encouraged to preview all sections of the module before starting. Most modules run for a period of seven (7) days, exceptions are noted in the Course Outline. You should regularly check the Calendar and Announcements for assignment due dates.
Risk is one of two pivotal axis in our financial enterprise – the other being return. This course establishes a setting for financial institutions (banks, insurance companies, asset managers, etc.) and the sources of financial risk. More directly, we apply mathematical-statistical-probabilistic modeling and analysis techniques for interest rate, credit, liquidity, and operational risk (among others) to support meeting the solvency mandates of central bankers and other regulatory bodies as embodied in the Basel accords and other forms of guidance.
Required
Hull, John C (2023). Risk Management and Financial Institutions (Wiley Finance) (6th edition): Prentice Hall
ISBN-13: 978-1119932482
Textbook information for this course is available online through the appropriate bookstore website: For online courses, search the website at http://ep.jhu.edu/bookstore.
It is expected that each module will take approximately 7–10 hours per week to complete. Here is an approximate breakdown: reading the assigned sections of the texts (approximately 2–3 hours per week) as well as some outside reading; listening to the audio annotated slide presentations (approximately 2 hours per week), and writing assignments (approximately 1–2 hours per week).
This course will consist of three basic student requirements:
Preparation and Participation (10% of Final Grade Calculation)
You are responsible for carefully reading all assigned material and being prepared for discussion. The majority of readings are from the course text. Additional reading may be assigned to supplement text readings.
Post your initial response to the Discussion questions by the evening of day 3 for that module week. Posting a response to the discussion question is part one of your grade for module discussions (i.e., Timeliness).
Part two of your grade for module Discussion is your interaction (i.e., responding to classmate postings with thoughtful responses) with at least two classmates (i.e., Critical Thinking). Just posting your response to a discussion question is not sufficient; we want you to interact with your classmates. Be detailed in your postings and in your responses to your classmates' postings. Feel free to agree or disagree with your classmates. Please ensure that your postings are civil and constructive.
I/We will monitor module discussions and will respond to some of the discussions as discussions are posted. In some instances, I/we will summarize the overall discussions and post the summary for the module.
Evaluation of preparation and participation is based on contribution to discussions.
Preparation and participation is evaluated by the following grading elements:
Timeliness (50%)
Critical Thinking (50%)
Preparation and participation is graded as follows:
Assignments (30% of Final Grade Calculation)
Assignments will include a mix of qualitative assignments (e.g. literature reviews, model summaries), quantitative problem sets, and case study updates. Include a cover sheet with your name and assignment identifier. Also include your name and a page number indicator (i.e., page x of y) on each page of your submissions. Each problem should have the problem statement, assumptions, computations, and conclusions/discussion delineated. All Figures and Tables should be captioned and labeled appropriately.
All assignments are due according to the dates in the Calendar.
Late submissions will be reduced by one letter grade for each week late (no exceptions without prior coordination with the instructors).
If, after submitting a written assignment you are not satisfied with the grade received, you are encouraged to redo the assignment and resubmit it. If the resubmission results in a better grade, that grade will be substituted for the previous grade.
Qualitative assignments are evaluated by the following grading elements:
Qualitative assignments are graded as follows:
Quantitative assignments are evaluated by the following grading elements:
Quantitative assignments are graded as follows:
Exams (60% of Final Grade Calculation, combined from an equal weight for the Midterm and Final)
The midterm exam will be available in Module 7 and the final exam will be available in the last Module. You will have one week to complete the exams and they will be due exactly one week from their release. You may use the course text to complete the exams.
The exams are evaluated by the following grading elements:
Exams are graded as follows:
Student assignments are due according to the dates in the Calendar and Assignments items in the corresponding modules. Professor Audley will post grades one week after assignment due dates.
We generally do not directly grade spelling and grammar. However, egregious violations of the rules of the English language will be noted without comment. Consistently poor performance in either spelling or grammar is taken as an indication of poor written communication ability that may detract from your grade.
A grade of A indicates achievement of consistent excellence and distinction throughout the course—that is, conspicuous excellence in all aspects of assignments and discussion in every week.
A grade of B indicates work that meets all course requirements on a level appropriate for graduate academic work. These criteria apply to both undergraduates and graduate students taking the course.
EP uses a +/- grading system (see “Grading System”, Graduate Programs catalog, p. 10). Example:
100–98 = A+ 97–94 = A 93–90 = A− 89–87 = B+ 86–83 = B 82–80 = B− 79–70 = C <70 = F
However, a grade of “A+” requires more than an excellent score (98-100). The instructor will also evaluate the students continuing level of excellence beyond what is required in the course – especially, as it relates to participation, contribution, and insight.
Final grades will be determined by the following weighting:
Item | % of Grade |
Preparation and Participation (Module Discussions) | 10% |
Assignments | 30% |
Exam[s] (Midterm + Final) | 60% |
Professor Audley is seriously committed to ethical behavior as it is a keystone requirement in the financial industry. Accordingly, serious breaches of academic ethics/misconduct (below) will be recommended for assigning a grade of “F” in the course.
Deadlines for Adding, Dropping and Withdrawing from Courses
Students may add a course up to one week after the start of the term for that particular course. Students may drop courses according to the drop deadlines outlined in the EP academic calendar (https://ep.jhu.edu/student-services/academic-calendar/). Between the 6th week of the class and prior to the final withdrawal deadline, a student may withdraw from a course with a W on their academic record. A record of the course will remain on the academic record with a W appearing in the grade column to indicate that the student registered and withdrew from the course.
Academic Misconduct Policy
All students are required to read, know, and comply with the Johns Hopkins University Krieger School of Arts and Sciences (KSAS) / Whiting School of Engineering (WSE) Procedures for Handling Allegations of Misconduct by Full-Time and Part-Time Graduate Students.
This policy prohibits academic misconduct, including but not limited to the following: cheating or facilitating cheating; plagiarism; reuse of assignments; unauthorized collaboration; alteration of graded assignments; and unfair competition. Course materials (old assignments, texts, or examinations, etc.) should not be shared unless authorized by the course instructor. Any questions related to this policy should be directed to EP’s academic integrity officer at ep-academic-integrity@jhu.edu.
Students with Disabilities - Accommodations and Accessibility
Johns Hopkins University values diversity and inclusion. We are committed to providing welcoming, equitable, and accessible educational experiences for all students. Students with disabilities (including those with psychological conditions, medical conditions and temporary disabilities) can request accommodations for this course by providing an Accommodation Letter issued by Student Disability Services (SDS). Please request accommodations for this course as early as possible to provide time for effective communication and arrangements.
For further information or to start the process of requesting accommodations, please contact Student Disability Services at Engineering for Professionals, ep-disability-svcs@jhu.edu.
Student Conduct Code
The fundamental purpose of the JHU regulation of student conduct is to promote and to protect the health, safety, welfare, property, and rights of all members of the University community as well as to promote the orderly operation of the University and to safeguard its property and facilities. As members of the University community, students accept certain responsibilities which support the educational mission and create an environment in which all students are afforded the same opportunity to succeed academically.
For a full description of the code please visit the following website: https://studentaffairs.jhu.edu/policies-guidelines/student-code/
Classroom Climate
JHU is committed to creating a classroom environment that values the diversity of experiences and perspectives that all students bring. Everyone has the right to be treated with dignity and respect. Fostering an inclusive climate is important. Research and experience show that students who interact with peers who are different from themselves learn new things and experience tangible educational outcomes. At no time in this learning process should someone be singled out or treated unequally on the basis of any seen or unseen part of their identity.
If you have concerns in this course about harassment, discrimination, or any unequal treatment, or if you seek accommodations or resources, please reach out to the course instructor directly. Reporting will never impact your course grade. You may also share concerns with your program chair, the Assistant Dean for Diversity and Inclusion, or the Office of Institutional Equity. In handling reports, people will protect your privacy as much as possible, but faculty and staff are required to officially report information for some cases (e.g. sexual harassment).
Course Auditing
When a student enrolls in an EP course with “audit” status, the student must reach an understanding with the instructor as to what is required to earn the “audit.” If the student does not meet those expectations, the instructor must notify the EP Registration Team [EP-Registration@exchange.johnshopkins.edu] in order for the student to be retroactively dropped or withdrawn from the course (depending on when the "audit" was requested and in accordance with EP registration deadlines). All lecture content will remain accessible to auditing students, but access to all other course material is left to the discretion of the instructor.