Grading Summary

To pass this unit (requires a Mark of 50 or better) the student must pass the final examination.

Professional Risk Manager (PRM) Certification

A passing grade in this Unit is required for students to obtain exemptions in the PRM Certification.  For further information about PRM certification please see:

https://www.mafc.mq.edu.au/about/education-partnerships/prmia-certification-program

CLASSES

Face-to-Face Teaching: Generally 20 hours

Timetable: Detailed timetable for classes are on the Centre’s web site www.mafc.mq.edu.au

Consultation Times: 

Students who wish to contact any of the teaching staff may do so through:

• The Unit’s iLearn site, in relation to general queries (so that all students may benefit); or 
• Individual consultation with the lecturer by email in the first instance, if necessary.

REQUIRED AND RECOMMENDED TEXTS AND/OR MATERIALS

Text: Nil

Additional Readings: 

• Additional readings are included in the unit notes or iLearn.
• Students should assume these readings are examinable unless otherwise advised. 

Lecture Notes: Available in printed form and electronically via iLearn. 

Study Problems: Students are required to work systematically through suggested problem sets. These problems will not be collected but they will help you prepare for the exams. Answers to the problems are posted on iLearn.

Pre-Unit Materials: Information papers on statistics, regression, accounting and other material may be found at http://www.mafc.mq.edu.au/applications/minimum-knowledge-requirement/pre-course-materials1/. Students should work through this material prior to commencing the degree.  The material will remain a useful reference as students progress through the program.

Computer Workshop: 

• The aim is for no more than three students working at each computer in these workshops. 
• Students with laptop computers are encouraged to bring them to class for use in computer workshops, provided that they have Microsoft Excel installed. Students should also install the R programming software from the CRAN website https://cran.r-project.org/ . Instructions are available on the website or in the course notes.
• Before classes commence students should carefully read the notice in your folder entitled “Computer Workshop Information”.  This document explains how to download some Excel Add-ins that will be needed (if you do not already have them).  There are also some files which you will need to obtain from iLearn.  Please copy these onto your hard-drive before classes commence.

Extension References: 

• Alexander, Market Models: A Guide to Financial Data Analysis, Wiley 2002.  

The book has 3 parts: volatility and correlation analysis, modelling the market risk of portfolios, and statistical models for financial markets.  It is a useful reference for quantitative analysts in the field of risk modelling, and comes with a CD-rom containing examples of models described in the text.  The book has a useful website:  www.wiley.co.uk/marketmodels

• Alexander and Sheedy (eds), The Professional Risk Manager’s Handbook.  

This Handbook contains study materials for those planning to attain certification through the Professional Risk Managers’ International Association.  It can be purchased online at www.prmia.org.  The chapters on linear algebra, numerical methods, VaR models (for market risk) are useful for this Unit.

• Alexander, Market Risk Analysis, Wiley 2008.  

Carol Alexander’s magnum opus!  Volume I “Quantitative Methods in Finance” has chapters on linear algebra, probability and statistics, numerical methods, and basic calculus.  Volume II “Practical Financial Econometrics” has chapters on GARCH modelling, principal component analysis etc.  Volume III “Pricing, Hedging and Trading Financial Instruments” includes coverage of portfolio mapping and volatility modelling.  Volume IV “Value-at-Risk Models” deals with historical simulation, Monte Carlo simulation, stress testing etc.

• Brooks, Introductory Econometrics for Finance, Cambridge University Press, 2008 (2nd Edition).  

This book has excellent coverage of GARCH, simulation methods and a review of fundamental mathematical and statistical concepts.  Also good discussion of software packages for econometric analysis in Chapter 1.  Available as an eBook.

• Christoffersen, Elements of Financial Risk Management, Academic Press, 2003.  

Very readable book with chapters on volatility modelling, simulation methods, backtesting and stress testing.  Has accompanying CD-rom with Excel spreadsheets.

• Dowd, Measuring Market Risk, Wiley 2004 (2nd Edition).  

Covers both parametric and non-parametric methods for measuring risk, simulation methods, liquidity risk, backtesting, stress testing, model risk etc.  Also has comprehensive technical appendices covering many technical issues such as extreme value theory, GARCH, copulas, principal component analysis etc.  Comes with a CD with Excel workbooks and a collection of Matlab risk measurement functions.

• Hull, Options, Futures, and Other Derivatives, Pearson Education, 9th Edition. 

A classic.  Relevant chapters/sections for this Unit are on Monte Carlo simulation, Value-at-Risk, Estimating volatilities and correlations.  

• Hull, Risk Management and Financial Institutions, Pearson, 4th  Edition 2015.  

A book with readable material on many of the topics covered in this Unit e.g. GARCH models, VaR, decomposition of risk, back testing, stress testing, historical simulation, extreme value theory, Monte Carlo simulation, model risk and liquidity risk.

• J.P. Morgan/Reuters RiskMetrics – Technical Document (also known as RiskMetrics Classic), 1996, 4th Edition, available at www.riskmetrics.com.  

This free document, downloadable from the web, is a 284 page book full of useful information on risk modelling.  You can download it in sections if you prefer.  While it contains some mathematical notation that may be offputting, it is a valuable resource for Students in this Unit.

• Mina and Xiao, Return to RiskMetrics: The Evolution of a Standard, www.riskmetrics.com 2001.  

This free document, downloadable from the web, is an update and restatement of the mathematical models in the 1996 RiskMetrics Technical Documents, now known as RiskMetrics Classic.  It reflects numerous modelling and technological advances that have become widespread in industry since 1996; and a commitment to transparency in modelling risk.  While it contains some mathematical notation that may be offputting, it is a valuable resource for Students in this Unit.

Calculators: 

• The Hewlett Packard calculator hp17bII+ is recommended.
• In examinations, any calculator may be used provided it does not have communication capability (e.g. a calculator app in a phone).
• Please obtain and become familiar with one of these calculators before classes commence. 

Assumed Knowledge: Mathematical content

• Finance has a high level of numerate content.  
• This Unit covers statistical concepts and includes some matrix algebra.  However the course is not for mathematicians but rather for those who need to interpret quantitative information.  Calculations are not the focus of attention.
• The mathematical difficulty of this unit is not significantly greater than in Financial Risk Management.  

Assumed Access:

• Access to a computer with word processing and spreadsheet capability is assumed, as is general student computer literacy.

TECHNOLOGY USED AND REQUIRED

Unit iLearn Site: 

• Found by logging on to iLearn ilearn.mq.edu.au, then clicking on ECFS899 Modelling Prices and Risk.
• This is where you will find forums, downloadable resources and links to important pages. 
• The forum allows you to communicate with other students and lecturer(s) and may provide supplementary material. 
• You are requested to post your questions on the forums at least 24 hours prior to the assignment submission date or the examination date. Questions posted after that time may not be answered. Please try to not leave your questions to the last few days. 

Important Notice: 

• It is important that you familiarize yourself with the Unit’s iLearn site. 
• Students should check the Unit’s iLearn site regularly (minimum twice a week and prior to all lectures) and look for updates and distribution of materials (including case studies) related to the unit or assessments and, if relevant, participate in forum discussions. 

1. INTRODUCTION

Topics: 

• Review of concepts from core Units
• Industry trends in modeling prices/risk (including regulatory trends)
• Why bother with quantitative risk modeling?
• What makes a good price/risk analyst?
• Ethical considerations in quantitative modelling

2. WORKING WITH HEAVY-TAILED DATA

Topics: 

• Testing for normality (review of hypothesis testing approach)
• The Student’s t distribution
• Analytical vs Simulation methods for estimating risk in trading portfolios
• Historical Simulation (aka bootstrapping without replacement, unconditional empirical method)
• Application: trading portfolios

3. MULTI-ASSET ANALYSIS

Topics: 

• Analysing portfolios with matrices
• Decomposing risk (incremental, marginal and component risk analysis)
• Simulating with multiple assets
• Mapping positions to risk factors
• Application: an international equity portfolio

4. ISSUES FOR COMMODITIES

Topics: 

• Relevant data for energy & commodities risk assessment – oil, power & gas prices, power & gas demand, temperature & wind speed
• Mean reverting processes
• Jump diffusion processes
• Optionality in commodity markets – gas storage, power plants, pipelines
• Application: Cashflow-at-Risk analysis for power generation & hedge portfolios

5. CHANGING VOLATILITY AND CORRELATION

Topics: 

• Testing for independence
• Volatility clustering 
• GARCH models and EWMA
• Asymmetry in Volatility
• Application: Estimating VaR and ES in currency and commodity portfolios
• Changing Correlation

6. ESTIMATING MODEL PARAMETERS

Topics:

• Review of classical linear regression model
• Maximum likelihood estimation (MLE) concept
• Numerical procedures for optimization
• Assessing models in-sample (significant parameters, LR test for nested models)
• Application: Estimating a volatility model (EWMA)

7. MODELLING A FORWARD CURVE  (ONLY IF TIME PERMITS)

Topics: 

• Seasonality in commodity forward curves
• Forward curve evolution
• Statistical analysis of the forward curve drivers
• Forward curve modeling vs spot price modeling
• Principal Components Analysis
• Single Factor and Multi Factor models of the forward curve
• Applications : gas storage valuation, calculating VaR

8. MODEL RISK

Topics: 

• How does model risk relate to risk models?
• Principles for assessing models
• Backtesting and validation
• Pulling it all together

Final Exam has been updated as a hurdle assessment.

Fail Hurdle grade added to grading descriptors table.

This Unit Guide may be subject to change. The latest version is on the Centre’s web site www.mafc.mq.edu.au.

Students should read the Unit Guide carefully at the start of semester.  It contains important information about the Unit.  If anything is unclear, please consult one of the unit lecturers.  

University Policy on Grading:

• Macquarie University’s Academic Senate has established a Grading Policy available at http://www.mq.edu.au/policy/docs/grading/policy.html. Your final result will include: 
  • A Grade ranging from Fail Hurdle to High Distinction; and
  • A numerical Mark which is a summation of the individual assessment components, providing the examination component is passed.
• It is important to note:
  • The Policy does not require that a minimum or maximum number of students are to be failed in any unit; 
  • Grades will not be allocated to fit a predetermined distribution; and
  • Grades for all individual assessment items will be released to students, but Marks may not necessarily be released.

Specific Unit Grading: 

• To pass this unit (i.e. requires a Mark of 50 or better), the student must pass the final examination.
  • Students who have attained a total raw mark of 50% or greater in a unit, but have failed the Unit’s exam requirement and who have demonstrated “sufficient effort” in the exam, will be granted a single opportunity to sit a Supplementary Exam which will be graded on a pass/fail basis. The unit mark and grade for students who pass this examination will be those corresponding to the original total raw mark of all their assessment tasks, including the original exam. That is, the Supplementary Hurdle Exam only determines the meeting of the hurdle requirement. Students who have attained a raw mark of 50% or greater in a unit, yet failed all attempts at the requirement, will be awarded an FH grade with a final mark of 49.
• All final Marks and Grades in the Applied Finance Centre are determined by a grading committee and are not the sole responsibility of the unit convenor.
• The core criteria used to assess student work in this unit are: 
  • Knowledge and understanding: Understanding key ideas, knowledge and use of concepts.
  • Application: Ability to apply theoretical ideas and frameworks in practice and in a critically reflective way. 
  • Reasoning and analysis: Ability to analyse, use critical reasoning and principles to formulate a position, balancing theory and personal reflection. 
  • Professional literacy and research: Understanding of professional factors (language and landscape) and ability to undertake appropriate research. 
  • Communication and presentation: Ability to communicate and present effectively (written and oral, as relevant).
  • Use of mathematical and statistical ideas: Ability to use mathematical and statistical ideas, methods and formulae appropriately. 
• Performance in relation to each of these criteria are assessed against the University’s grading descriptors:

Review of Grade and final examination Script viewing:

• A student who has been awarded a final grade for a unit and who does not believe it is an accurate reflection of their performance, and has grounds for such a claim and can demonstrate those grounds, may apply to have their grade reviewed. 
• For information on requesting a review of grade and/or viewing your final exam script, please refer to the University’s Grade Appeal Policy at http://www.mq.edu.au/policy/docs/gradeappeal/policy.html and MAFC Program Rules & Procedures at http://www.mafc.mq.edu.au.