Risk management and derivatives

René M. Stulz



Office hours: Monday and Wednesday, 3:30 to 5 p.m., or by appointment.

Class members have access to handouts.

This course is designed to train the participants in evaluating financial risks and managing them with the use of derivatives. The course starts with an analysis of how risk management contributes to firm value and then turns to the presentation of risk measures that are useful in risk management. After making sure that the participants know how to compute value-at-risk (VaR), the course turns to how to use VaR and related risk measures in project selection, performance evaluation, and managerial compensation. The course then focuses on using derivatives to change a firm's financial risks. The course shows how forwards and futures, equity, interest rate, exchange rate and commodity options, plain vanilla and exotic swaps, and exotic options can be used to manage financial risks and how the risks of these derivatives can be evaluated. After a discussion of credit risks and credit derivatives, the course finishes with a review of implementation issues. The emphasis of the course is on risk management rather than on the technical details of pricing derivatives. The course deals with interest rate, exchange rate, commodity price, equity, and credit risks. Risk management problems for financial intermediaries as well as for firms outside the financial sector are examined. Students learn how manage financial risks through lectures, exercises, and cases.

Course materials: Selected chapters of my forthcoming textbook "Derivatives, financial engineering, and risk management;" cases; lecture slides. The cases in order of discussion are: American Barrick; Tifany; Crédit Général; Cephalon; GM liability management; General Re; Syscom. All cases are in the course packet. The VaR exercise will be given in class. Selected chapters of the textbook are in the course packet also. The chapters of the book that are not in the course packet are available on the course website. The Powerpoint slides for the lectures are available on the course website also prior to each class.

Course requirements: Students will be responsible for five assignments (to be chosen from seven) and take a final examination. The final examination and the assignments will count each for 125 points; class participation will count for 50 points.


1. Course introduction and overview.
René M. Stulz, "Rethinking risk management," Journal of Applied Corporate Finance, Fall 1996, 8-24.

2. Risk management and firm value.
Chapter 3.
Gordon M. Bodnar and Richard C. Marston, "1998 Survey of Financial Risk Management by U.S. Non-Financial Firms," Wharton School, University of Pennsylvania and Grey Hayt, CIBC World Markets, July 1998.

Peter Tufano, "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," 1996, Journal of Finance, 51, 1097-1137.

3. American Barrick, HBS case (mandatory).

4. Measuring risk: volatility, value-at-risk, Riskmetrics™.

Chapter 4.

6. Exercise on VaR (mandatory).

7. The Crédit Général, HBS case.

8. Capital budgeting, performance evaluation, compensation and risk measures.

Chapter 4.

Edward Zaik, John Walter, and Gabriela Kelling with Chris James, "RAROC at Bank of America: From Theory to Practice," Journal of Applied Corporate Finance, Summer 1996, 83-92.

9. Hedging with futures and forwards.

Chapters 6 and 7.

10. Tiffany & Co.-1993, HBS case.

11. Measuring exposures.

Chapter 8.

Peter Tufano, The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry, Journal of Finance, 1998) 53, 1015-1052.

12. Hedging with options.

Chapter 10 and Chapter 13.

13. Cephalon, Inc., HBS case

14. Interest rate models and fixed-income derivatives.

Chapters 9, 14 (ignore the HJM section).

15. Liability Management at General Motors, HBS case.

16. Swaps and exotic options.

Chapters 15, 16 and 17.

17. Credit risks and credit derivatives.

Chapter 18 (to be distributed later).

18. General Re, HBS case.

19. Syscom Computers, HBS case (mandatory).

20. Course conclusion: The limits of value-at-risk and LTCM.

Last updated:   August 27, 1999 12:51:53 PM