RISK AND FINANCIAL INSTITUTIONS

ECONOMICS 2191A-001
Department of Economics
Western University

D. McKeon September 2015

Office SSC 4052

Office Hours: W,F: 11:30-12:30
Class: T: 8:30-10:30; TH: 8:30-9:30
Classroom: UCC 56
Email: dmckeon@uwo.ca

Registration

You are responsible for ensuring you are registered in the correct courses. If you are not
registered in a course, the Department will not release any of your marks until your registration
is corrected. You may check your timetable by using the Login on the Student Services website
at https://student.uwo.ca. If you notice a problem, please contact your home Faculty Academic
Counselor immediately.

Prerequisite Note

The prerequisite(s) for this course is (are) One of Economics 2122, 2150, 2152 or 2154

You are responsible for ensuring that you have successfully completed all course prerequisites,
and that you have not taken an anti-requisite course. Lack of pre-requisites may not be used as a
basis for appeal. If you are found to be ineligible for a course, you may be removed from it at
any time and you will receive no adjustment to your fees. This decision cannot be appealed.

If you find that you do not have the course prerequisites, it is in your best interest to drop the
course well before the end of the add/drop period. Your prompt attention to this matter will not
only help protect your academic record, but will ensure that spaces become available for students
who require the course in question for graduation.
Course Objectives.

Since the financial crisis of 2008 much attention has been paid to the financial risk that banks
and other financial institutions are exposed to as they attempt to maximize profits. This course
will investigate the nature of risks that financial institutions incur, the methods used to measure
risk and the techniques designed to mitigate risk.
The course will cover the main sources of risk: interest rate risk, credit risk, liquidity risk and
market risk as well capital adequacy issues.

We will also examine the instruments used to hedge risk: forwards, futures and options.

We will also briefly cover securitization of assets.

Learning Outcomes.

At the end of this course students will be able to:

Recognize the various types of risk involved with the operation of banks and other
financial institutions.
Appraise the level of risk exposure in specific areas of an institution's operations (e.g.
loans, trading book).
Propose basic strategies to mitigate (hedge) risk.

Assessment

There will be two midterm tests and a final exam. There are no marked assignments, but I will
assign exercises and problems that I expect students to do. The solutions will be worked out in
tutorial fashion in class. These solutions will not be posted.

Test 1........................30%

Test 2........................30%

Final..........................40%

Dates

Test 1.......................Oct 6 during class time, room TBA

Test 2.......................Nov10 during class time, room TBA

Course Materials.

The main textbook used in the course will be; Saunders, Anthony, Marcia Cornett and Patricia
McGraw Financial Institutions Management a Risk Management Approach 5th Canadian edition
McGraw Hill Ryerson 2014 (FI).

For more technical topics I will use material from: Hull, John .Fundamentals of Futures and
Options Markets Prentice Hall 2011 (FOM) and Hull, John. Risk Management and Financial
Institutions 3rd edition Wiley 2012 (RM).

There will also be a class website on OWL where I will post materials. This website will not be
designed as an online course. Class attendance is mandatory. Any material, techniques or
examples taken up in class may form the basis of examination questions. I will not post problem
solutions, or handouts, or exercises done in class. I will not post my own notes. I will post any
slides that are used in class.

Course Outline

Introduction to Risks ................................................... chapter 7 (FI)

Interest Rate Risk ...................................................... chapter 8, 9 (FI)

Value at Risk................................................................chapter 20 (FOM), chapter 8 (RM)

Credit Risk....................................................................chapter 10.11(FI) and chapter 14, 15 (RM)

Liquidity risk ................................................................chapter 12, 13 (FI) and Chapter 19 (RM)

Market Risk...................................................................chapter 15 (FI) and Chapter 20 (RM)

Capital Adequacy..........................................................chapter 20 (FI)

Futures and Forwards.....................................................chapter 22 (FI) and Ch3, 6 (FOM)

Options ..........................................................................chapter 23 (FI) and Chapter 13 (FOM)

The Greeks.......................................................................chapter 17 (FOM).

Risk management Mistakes to avoid (if time allows).....chapter 22 (RM)

Topics may be added or deleted as the course progresses. All changes to the outline,
including any change to the order of topics taken up, will be announced in class. Absence
from class cannot be used as an excuse for not knowing about changes.
 Please Note
Department Policies for 2015 2016

Remember that the University expects all students to take responsibility for their own
academic Programs. Also remember to check your registration to make sure you are
enrolled in the correct courses.

1. Guidelines and policies for the Faculty of Social Science and the Department of
Economics are posted online in the current Western Academic Calendar at
http://westerncalendar.uwo.ca.

2. Students must familiarize themselves with the Rules of Conduct for Examinations
http://westerncalendar.uwo.ca/2015/pg136.html.

3. Cheating as an academic offence: Students are responsible for understanding what it

means to cheat. The Department of Economics treats cheating incidents very seriously
and will investigate any suspect behavior. Students found guilty will incur penalties that
could include a failing grade or being barred from future registration in other economics
courses or programs. The University may impose further penalties such as a notation on
your official academic transcript, suspension or expulsion.

4. Plagiarism: Students must write their essays and assignments in their own words.
Whenever students take an idea or a passage from another author, they must
acknowledge it by using quotation marks where appropriate and referencing with
footnotes or citations. Plagiarism is a major academic office (see Scholastic Offence
Policy in the current UWO Academic Calendar at
http://westerncalendar.uwo.ca/2015/pg113.html).

The University of Western Ontario uses software to check for plagiarism and students
may be required to submit their written work in electronic form. Those found guilty will
have penalties imposed as noted in point 3.

5. It is Department of Economics policy that NO assignments be dated, stamped or

accepted by staff. Students are responsible for submitting assignments in class or to the
instructor during office hours.

6. When appealing a mark, students should refer to the Universitys Procedures in the
current UWO Academic Calendar (http://westerncalendar.uwo.ca/2015/pg112.html).
Please note the relevant deadlines.

The Department will not consider any appeal unless an attempt has been made to settle
the matter first with your instructor. If after this discussion you remain dissatisfied with a
grade or other decision, you may proceed with a written appeal (e-mails are not
acceptable) to the Undergraduate Director in Economics, stating the reasons for your
appeal. A useful form and checklist is provided at
(http://economics.uwo.ca/undergraduate/program_counselling/responsibilities_policies.html#appe
als).

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7. Systematic adjustments of a class grade distribution (either up or down) can occur in
Economics courses. The fact that grades have been adjusted is not grounds for an
appeal.

8. Note the following add and drop deadlines:

Last day to add a First term half course:

Friday, September 18th, 2015

Last day to drop a First term half course without academic penalty:
Friday, November 5th, 2015

9. Faculty of Social Science policy states that oversleeping or misreading an exam

schedule is not an excuse for a make-up. This rule applies to all mid-term tests and final
exams in the Department of Economics.

Policy Regarding Makeup Tests and Final Examinations

Academic Accommodation will not be granted automatically on request. You must

demonstrate by documentation that there are compelling medical or compassionate
grounds before academic accommodation will be considered.

If you decide to write a test or an examination, you must be prepared to accept the mark you
earn. Rewriting tests or examinations, or having the value of the test or examination
reweighted on a retroactive basis, is not permitted. Book airline flights after you know the
dates of your final examinations. Airline flights must not conflict with test or final exams.

If you are requesting a makeup test for a midterm or a final examination, unless medically
incapable, notify your instructor by email or phone, preferably prior to the scheduled date of
the test, but definitely within 24 hours of the date of the test or exam. Failure to follow this
procedure may result in denial of a request for academic accommodation or result in a
grade of zero. Set up an appointment as soon as possible to meet personally with your
instructor. If the instructor is not available, you may send an email message, copying the
Undergraduate Coordinator at econugrd@uwo.ca (Social Science Room 4075). Notifying
your instructor of a missed test or exam does not automatically entitle you to a
makeup test.

Students who seek a makeup test or examination must provide medical or other relevant
verification that their absence from a regularly scheduled test or examination is beyond their
control. Documentation must support your reasons. Medical documentation should be given
to the Academic Counselling Office of your home Faculty as soon as possible (preferably
within 24 hours of the test) if you know you may not be able to write your final examination
on the scheduled day and time. Failure to follow this procedure, or to provide supporting
documentation, may result in denial of a request for academic accommodation or result in a
grade of zero. If your documentation is not acceptable, you will be given a zero for the
missed test.

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For personal illness, if you consult Student Health Services regarding your illness or
personal problem, you should request a Student Medical Certificate from the physician. If
you were seen by an off-campus doctor, obtain a certificate from his/her office at the time of
your visit. The off-campus medical certificate form must be used and can be found at:
http://www.uwo.ca/univsec/pdf/academic_policies/appeals/medicalform.pdf. Notes stating "For
Medical Reasons" are not considered sufficient.

For any other circumstances, if you are not sure what documentation to provide, ask your
Academic Counselor. If your documentation is judged sufficient, the academic counselor will
issue a Recommendation for a Special Examination (a single form for midterms or a triple
color form for final examinations). Once you have this form, contact your instructor as soon
as possible to make arrangements. Even if approved from your home faculty Academic
Counsellor, there is no guarantee that you will be allowed to write the makeup test and
exam.

For final examinations, you need permission from your home Faculty Counsellor, your
instructor, and the Department Undergraduate Director. Failure to follow this procedure may
result in an examination grade of zero. You must ensure that the Special Examination form
has been signed by the instructor and Department Undergraduate Director and that the form
is returned to the Academic Counseling Office for approval without delay. Make-up final
examinations, if permitted, will be written within one month of the end of the exam period.

Policies Regarding Academic Accommodation

Information about the Faculty of Social Sciences policies regarding academic

accommodation is found on its website at
http://counselling.ssc.uwo.ca/procedures/havingproblems.asp or in Social Science Room
2105. Your Academic Rights and Responsibilities are also outlined in the current UWO
Calendar at http://westerncalendar.uwo.ca/2015/pg111.html. Claiming that you didnt know
what to do is not an acceptable excuse for not following the stated procedures.

Policy Regarding Class Attendance

If your instructor views your class attendance as unsatisfactory, you can be prohibited from
writing the final examination. If there is intent to make use of this University policy, you will
be notified in writing.

Statement on Mental Health and Support Services

If you or someone you know is experiencing emotional/mental distress, there are several
resources here at Western to assist you. Please visit
http://www.uwo.ca/uwocom/mentalhealth/ for more information and a complete list of
resources, as well as how to obtain help.