The global financial crisis of 2007-08 brought into sharp focus the need for sound risk management practices in all organisations. Yet, despite the lessons said to have been learnt by this crisis we have recently seen further bank failures in the US and the rescue of the banking giant Credit Suisse by the Swiss authorities. Seemingly there is still more that needs to be done to get organisations to understand and manage risks properly.
In this module you'll examine the financial and non-financial risks faced by organisations, first by considering the nature of each risk and how exposure to that risk can be measured. This is important since management attention and risk management resources should focus on those risks that are both likely to arise and are potentially costly – perhaps fatal – to organisations. You'll study various risk management techniques used to mitigate unwanted risk exposures. These methods include 'hedging' techniques and the use of derivatives.
In addition to financial theory, you'll look at real cases encompassing both failures and successes in different aspects of risk management. You'll also look at risk management across a number of organisations.
What you will study
The module is divided into the following five units, and each unit comprises sessions that involve readings, discussions and other activities.
Unit 1
The module begins by introducing the various financial risks that confront organisations – credit risk, liquidity and refinancing risk, interest-rate risk, foreign exchange risk and operational risk. You'll also be introduced to the main types of derivatives instruments and the reference interest rates that are used in conjunction with them.
Unit 2
This unit studies derivatives known as forward contracts and their exchange traded equivalents, futures contracts. These contracts can be used to fix the future price at which an asset can be bought or sold. They can be used by speculators expecting the actual future price to differ from the fixed price or by hedgers, such as farmers, who want to fix the price at which they can sell their produce. Forwards and futures can be based on many different types of assets, including foreign exchange, equities, bonds and commodities.
Unit 3
This unit covers different types of options. We examine how options are valued by looking at the valuation components of intrinsic and time value and the exercise price. The analysis is somewhat technical, but you'll have an option valuation spreadsheet and software guide to assist you. In addition, a detailed explanation of the principles of option pricing is provided.
We'll also look at two other important derivatives: swaps and swaptions, to see how these are priced and how they can be used to manage risks.
Unit 4
This unit covers a number of financial risks. These include currency risk and commodity risk and how organisations can manage these; interest rate risk and how various financial instruments can be used to help manage (or hedge) this risk; liquidity and credit risk management – two key areas of risk management that have come under intense scrutiny in recent years.
You'll also explore the management of risk in bond portfolios. This includes the subject of immunisation, which is a way of managing interest rate risk arising from fixed income investments.
Unit 5
The unit starts by looking at how aggregate interest rate and other financial risks can be measured and managed by organisations. This involves understanding the concepts of gap analysis and Value-at-Risk (VaR). Other market risks – like FX risk – can also be managed by VaR.
Attention then turns to operational risk – the risk arising from the failure of systems and controls. This is not, in itself, a financial risk, but operational risk failures are commonly the root cause of losses arising from financial transactions. This unit then focuses on enterprise risk management (ERM) processes for risk management. This is a holistic approach to risk management that involves managing risks in aggregate rather than separately.
The unit and the module end by reflecting on the dangers of derivatives and some ethical issues that may arise from their use.
You will learn
This module aims to enable you to:
- understand derivatives and their use in risk management
- explain credit risk, liquidity risk, FX risk, interest rate risk, and operational risk and understand how these risks can be measured and managed
- understand the different features of derivative instruments
- undertake a 'risk-mapping' of a company or organisation
- understand operational risk and how it can be managed
- appreciate the benefits of an integrated enterprise risk management (ERM) approach to risk management.
Vocational relevance
Employment opportunities in the field of risk management have grown in recent years, partly in response to the litany of reported risk management failings. This module will be of particular interest to you if you're working, or planning to work, in an organisation in the financial sector or in the finance division of a company or public sector/not-for-profit organisation.
The subject matter of the module is, though, designed to be useful for managers and prospective managers whose immediate responsibilities are outside the domain of risk management. Given the growing catalogue of risk management failures in all sectors – and the growing emphasis being placed on effective risk management by all organisations – the content provides knowledge and skills that all effective managers should possess.
Entry
All entrants must hold a BA/BSc degree awarded by a recognised university or equivalent.
Various higher education and professional qualifications are considered equivalent to a degree. If you hold a qualification that you believe is an equivalent level to a UK degree, you should contact us. The Open University Business School Masters Programme Committee is responsible for judging whether applicants' qualifications meet the requirements for admission.
You will also need an appropriate facility in English language, sufficient to be able to work effectively at postgraduate level; generally, this means capability equivalent to an International English Language Test System (IELTS) score of 6.5. To assess your English language skills in relation to your proposed studies you can visit the IELTS website. If you think either of these possibilities may apply to you, please speak to an adviser.
It is strongly recommended that you are comfortable with the use of numerical methods and use of spreadsheets. If you are unsure about these skills, we suggest you familiarise yourself with illustrative numerical skills and methods prior to studying.
If you have any doubt about the suitability of the course, please contact us.
Preparatory work
No preparatory work is required, although you may want to assess your maths skills using the diagnostic quiz for the MSc in Finance if you have not already done so prior to your earlier studies.