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The financial environment of the past 25 years has been characterized by increasing volatility. This volatility has generated financial distress in many organizations as illustrated by the S&L crisis of the 1980s. Financial risk management has become a popular practice among financial institutions to protect against the adverse effects of uncertainty caused by fluctuations in interest rates, exchange rates, commodity prices, and equity prices. New financial instruments and techniques are constantly being developed and many of these techniques are being used by an increasing number of firms across various industries. The insurance industry, however, has only recently begun to apply these new techniques in a widespread manner.

This course will introduce many of the popular measures of financial risk and describe the techniques used to manage resulting exposures. The course will also analyze specific risks to which insurers are exposed and analyze how insurers can apply financial risk management techniques to reduce surplus volatility. Students are expected to have at least seen basic concepts in other courses such as interest rate risk, default risk, and duration. In addition, students should be familiar with the standard characteristics of forwards, futures, and options contracts.

There are three main aspects of the course. These topics are roughly separated by exams. The first part of the course introduces the basic risk management tools and techniques. This becomes the foundation for the the whole course. Second, the course covers the more advanced techniques of risk management techniques that are required for analyzing insurance enterprises. Third, we will apply many of the learned techniques to property/casualty insurers, life insurers, and pension funds and briefly introduce some advanced topics of financial risk management.

Grades for the class will be based on the following distribution: