Home page of Business 35131. Prof. Pietro Veronesi

Financial Engineering: Cases in Financial Risk Management

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Course Overview

The 2007 – 2009 financial crisis highlighted once again the importance of financial risk management, not only by financial institutions, but by corporations more generally. Although a 2009 ISDA survey shows that over 95% of Fortune 500 firms use derivatives for risk management purposes, a hot discussion resurfaced on the usefulness of popular risk measures, such as Value-at-Risk, 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. As the global derivatives market keeps increasing – it reached $592 trillion (notional) in December 2008, a 40% increase over its value in December 2006 – 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. We learn the pros and cons of many derivative securities, from standard futures and options, to the more advanced credit default swaps (CDS) and collateralized debt obligations (CDOs), as they have become main stream securities. 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.

This course is at the same level of analytical complexity as Investments (35100) and Financial Instruments (35100), which are strict prerequisites. Cases draw from many industries and different times, including in particular the 2007 – 2009 crisis.

Note: Fixed income Asset Pricing (Bus 35130) and Mathematical Models of Option Pricing (Bus 35132) are not prerequisites for this course.

To know more about the course, you can download a PDF file with the Course Syllabus

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The Teaching Notes;
The Board;
The Excel Files;
The Assignments;
Data ;

You can contact me by sending your mail at pietro.veronesi@gsb.uchicago.edu