Course TextsBabbel, Merrill, and Zacharias4/7 DFA D’Arcy, Gorvett, Herbers andHettinger and D’Arcy and Gorvett 24/9 Securitizing Catastrophe Risk GorvettFinal Exam Tuesday, May 6 – 8-11 amUNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C EFinance 432 – Managing Financial Risk for Insurers – Spring 2008Professor Stephen D’Arcy311 Wohlers HallOffice Hours: Thursday, 1-2:30 pm and by appointmentE-mail address: [email protected] Telephone: 333-0772Course Website: http://www.cba.uiuc.edu/~s-darcy/Fin432/2008/index.htmlCourse TextsSmithson, Charles W., 1998, Managing Financial Risk: A Guide to Derivative Products, Financial Engineering, and Value Maximization (Third Edition), (Chicago: Richard D. Irwin) Fabozzi, Frank J., 1998, Valuation of Fixed Income Securities and Derivatives (Third Edition), (New Hope, PA: Frank J. Fabozzi Associates). Listed as VFISD on syllabus.Course ObjectiveThe financial environment of the past 30 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 and the recent subprime mortgage crisis. 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 techniquesused 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 interestrate 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. The first part of the course introduces the basic risk management tools and techniques. This becomes the foundation for 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.To insure that disability-related concerns are properly addressed throughout the semester, students with disabilities who require reasonable accommodations to participate in this class are asked to see me within the first two weeks of the semester.Tentative Course ScheduleDate Topic Reading Assignment1/14 Introduction to Financial Risk Management Smithson Ch. 1, Santomero &Babbel 1/16 Actuary of the 3rd Kind D'Arcy, "Actuary of the 3rd Kind"1/23 Bond Pricing and Forward Interest Rates VFISD Ch. 1, 2 and 31/28 Forwards Smithson Ch. 2, 4, 5 1/30 Futures/Interest Rate Futures Smithson Ch. 6, 7 andVFISD Ch. 122/4 Swaps and Options Smithson Ch. 8-122/6 Interest Rate Options: Caps/Floors TBA2/11 Credit Derivatives D’Arcy, McNichols and Zhao2/13 Use of Derivatives by Insurers Cummins, Phillips, and Smith2/18 Goals of ALM, Duration and Convexity Part 1 VFISD Ch. 42/20 Duration and Convexity Part 2 D'Arcy and Gorvett 12/25 Review for the First Exam2/27 Exam 13/3 Stochastic Processes VFISD Appendix to Ch. 33/5 Interest Rate Models Ahlgrim, D’Arcy and Govett 13/10 Financial Scenario Generators Ahlgrim, D’Arcy and Gorvett 23/12 Embedded Options and The Binomial Method VFISD Ch. 5, 6, 7Babbel, Merrill, and Zacharias3/24 CMOs and Monte Carlo Simulation VFISD Ch. 8 and Seila3/26 CDOs TBA3/31 Valuing Interest Rate Options and Swaps VFISD Ch. 13, 144/2 Interest Rate Sensitivity Ahlgrim, D’Arcy and Gorvett 34/7 DFA D’Arcy, Gorvett, Herbers and Hettinger and D’Arcy and Gorvett 24/9 Securitizing Catastrophe Risk Gorvett4/14 Exam 24/16 Loss Reserve Ranges D’Arcy, Au and Zhang4/21 Longevity Risk Blake, Cairns and Dowd4/23 New Insurance Securitizations TBA 4/28 The Next Risk Management Frontier – ERM D'Arcy, "Actuary of the 4th Kind"4/30 Review for Final ExamFinal Exam Tuesday, May 6 – 8-11 amGrades for the class will be based on the following distribution: Number of Points Two hourly exams 60 Final Exam 50 Financial Scenario Project 20 DFA Project 20 Homework Assignments 80 Class Exercises 20 Total