F71AR Applied Risk Management

Prof Andrew Cairns

Course co-ordinator(s): Prof Andrew Cairns (Edinburgh).


The aims of this course are:

  • To equip students with a variety of tools to tackle problems involving univariate financial time series
  • To provide a good grounding in the best practice of risk management within an organisation
  • To understand economic measures of capital and capital allocation
  • To have a thorough understanding of operational risk in its various forms

To identify and measure risks and then to take actions to mitigate risks and exploit risky opportunities through good risk management strategies.

Detailed Information

Pre-requisites: none.

Location: Edinburgh.

Semester: 2.


  • Operational risk management
    • Non-quantitative and quantitative methods and tools for managing operational risk
    • Different ways of quantifying operational risk under Basel II
  • Banking and insurance regulatory systems
  • Risk management governance and culture
    • Risk management governance structures and the risk management culture
    • Governance issues including agency, audit and legal risk
    • Rating agency assessments of an organisation’s risk management operation
  • ERM frameworks and assessment
  • Risk appetite and risk tolerance
  • Economic capital and capital allocation
  • Credit risk management
  • Modelling and assessment of market risk
    • Models for volatility clustering
    • Non-normality, fat tails and skewness
    • Assessment of value at risk
    • Backtesting VaR models
  • Market risk management
    • Dynamic versus static hedging using financial derivatives; practical considerations
  • Interest rate risk management
    • Modern approaches to immunisation of interest-rate risk
    • Asset-liability modelling
  • How risks and risky opportunities affect the selection of strategy
  • Advantages and disadvantages of different approaches to risk reduction; e.g. costs and benefits; information asymmetry; transparency; liquidity; basis risk; moral hazard
  • Optimising risks and opportunities relative to the Board’s declared risk appetite and risk tolerances
  • Case studies: examples of past disasters and examples of good practice
    • Risk analysis of real and hypothetical scenarios including non-quantifiable risks; views of different stakeholders

Learning Outcomes: Subject Mastery

On completion of this course the student should be able to:

  • Analyse a variety of financial time series
  • Demonstrate a good understanding of the different types of operational risks that might arise in an organisation, and be able to identify potential operational risks in a given scenario
  • Use quantitative and qualitative methods for identifying and analysing operational risk
  • Demonstrate an understanding of the main international guidelines on good risk management practice and good governance
  • Understand how a ratings agency assess risk management practice and use this to improve risk management practice in an organisation
  • Show how to measure the economic value of a risky venture and how this can be used to influence decision making
  • Understand the different methods for how to allocate capital within an organization and apply these methods in a variety of situations
  • Demonstrate how to establish at Board level an organisation’s risk appetite, risk objectives and risk tolerances
  • Show to optimize risk and opportunities given Board-level constraints on risk appetite and risk tolerances
  • Determine an organisation’s overall risk exposure
  • Show an understanding of the importance of asset-liability modeling for a financial institution
  • Analyse real and hypothetical case studies of good and bad risk management practice
  • Analyse real and hypothetical scenarios from the perspective of different stakeholders


Scholarship, Enquiry and Research (Research-Informed Learning)

  • Develop and recommend strategies for active management of risks using a variety of methods
  • Recommend risk mitigation strategies by transfer of risk
  • Develop strategies for management and mitigation of credit risk
  • Recommend risk reduction strategies without transferring risk to an external agency
  • Demonstrate an understanding of the pros and cons of the different approaches to risk mitigation
  • Show an understanding of modern methods for management of interest-rate risk

Learning Outcomes: Personal Abilities

Industrial, Commercial & Professional Practice

  • Show an appreciation of the interface between academic theory and industrial practice

Autonomy, Accountability & Working with Others

  • Demonstrate the ability to learn independently and as part of a group
  • Manage time, work to deadlines and prioritise workloads

Communication, Numeracy & ICT

  • Present results in a way that demonstrates that they have understood the technical and broader issues of financial risk management
  • Show an appreciation of the societal role of risk management in protecting the consumer and other stakeholders

SCQF Level: 11.

Credits: 15.

Other Information

Help: If you have any problems or questions regarding the course, you are encouraged to contact the course leader.

Canvas: further information and course materials are available on Canvas