Course overview

This section explains what the course is about, what students are expected to learn, how the course works, and the standards of academic integrity and professional responsibility that apply throughout the semester.

Course description

Financial risk management involves identifying, quantifying, monitoring, and mitigating financial risks. In this course, we focus on credit risk and market risk models, with practical implementation using R and Python.

Credit risk refers to the potential loss that arises when a borrower fails to meet debt obligations. Managing credit risk requires measuring the probability of default and the potential losses associated with default. While many traditional courses focus mainly on firms, this course also considers credit risk at the individual and country levels. This broader perspective allows students to apply financial and economic analysis across different types of borrowers and institutional contexts.

Market risk refers to the potential for financial losses caused by adverse movements in market prices, including the prices of stocks, bonds, currencies, commodities, and other financial instruments. This risk is inherent in financial markets, where prices respond to economic indicators, geopolitical events, interest rates, market sentiment, and other sources of uncertainty.

The main textbooks recommended for this course are Hull (2022) and Hull (2018), which cover influential credit risk models used in the financial industry. Additional references include Drake and Fabozzi (2010), Crouhy, Galai, and Mark (2014), and Brealey et al. (2020), which provide broader discussions of risk in financial markets. The course also uses Lozano (2024), which bridges theoretical model analysis and practical computational modeling using R. Complementary references include Hull (2020) and James et al. (2021).

This Spotify podcast provides additional context on financial risk.

For the specific sequence of topics, activities, deadlines, and required readings, refer to the course calendar: Schedule.

Objectives

The course has three main objectives:

  1. Understand the course topics. Students are expected to develop a solid understanding of the models, techniques, and principles covered in the course, especially in financial economics, financial risk management, and quantitative finance.

  2. Apply quantitative techniques. Students will learn how to implement financial models by translating paper-based formulations into functional computer code. Through course activities, students will use computational tools to analyze financial data, generate results, and interpret findings.

  3. Develop professional financial competencies. The course is designed to strengthen the practical abilities required of financial professionals, practitioners, and junior researchers. These include financial analysis, financial modeling, computational implementation, interpretation of results, and written reporting.

The course combines theoretical understanding with practical application. Its purpose is not only to present financial risk concepts, but also to help students use them in a rigorous, reproducible, and professionally relevant way.

To achieve these objectives, students are expected to complete several tasks throughout the semester:

  1. Read carefully. Students must study the recommended textbooks, academic papers, course notes, and other resources provided. Reading is a fundamental requirement for understanding the course material.

  2. Work consistently. Success in the course requires sustained effort. Students are expected to attend class, participate actively, complete course activities, and engage seriously with the course material.

  3. Ask for assistance when needed. Students who encounter difficulties or have questions are encouraged to contact me at <martin.lozano@udem.edu>. I can help clarify concepts, resolve doubts, and support a deeper understanding of the material. However, students are responsible for asking for help in a timely manner.

Learning usually requires repeated attempts, additional inputs, and persistence. Persistence and determination are central to the learning process. Persistence means continuing to work toward a goal despite difficulties, obstacles, or setbacks. It requires motivation, resilience, focus, and sustained effort. By reading carefully, working consistently, and seeking assistance when needed, students increase their chances of understanding the material and succeeding in the course.

Mechanics

The course operates on the assumption that students will approach it with enthusiasm, a positive attitude, and a willingness to engage actively with the material. The following expectations apply throughout the semester:

  1. Active participation. Students are expected to be proactive and engaged throughout the semester. This includes completing course activities and readings on time. Active participation contributes to a deeper understanding of the subject matter.

  2. Understanding and application. Students are expected to study the material thoroughly, understand the underlying concepts, and apply them in relevant financial contexts.

  3. Course calendar. The course calendar, provided in Schedule, is the roadmap for the semester. It lists lecture topics, required readings, course activities, deadlines, and exams. Students are responsible for consulting it regularly and following its timeline.

  4. Time management. Some tasks may require more than a week to complete. Students must plan ahead and allocate enough time to fulfill their course responsibilities effectively.

Students are expected to approach the required material proactively and conscientiously. This means studying in advance and engaging in independent practice. Doing so creates the conditions for meaningful class participation, useful comments, and thoughtful questions.

Conscious and proactive study habits are important because they help students stay on track and avoid falling behind. They also ensure that students are familiar with the topics discussed in class and have a foundation on which to build. Studying and practicing in advance allows students to take better advantage of the learning opportunities provided in the course, deepen their understanding, reinforce key concepts, and gain additional insights.

If a student does not engage in conscious study and practice, or cannot do so because of their current circumstances, they may struggle to keep up with the course requirements and experience frustration. Falling behind can lead to loss of interest, lower grades, and potentially failure. To reduce this risk and improve learning outcomes, students are strongly advised to study the required material in advance and practice independently as much as necessary. This preparation improves class participation and increases the probability of success.

In this video, students from The University of Melbourne share useful strategies for getting the most out of university lectures.

In accordance with some of the United Nations Sustainable Development Goals, see UN (2015), all compulsory readings and activity submissions are available in electronic format. Complementary materials and activities may be incorporated or adjusted during the semester depending on relevant news or events that do not yet exist or are difficult to anticipate at the beginning of the term. If this happens, I will inform students in advance.

Students should be confident that all course materials and activities are suitable for undergraduate students enrolled in a prestigious university. No intellectual challenge in this course is intended to be impossible to overcome with the appropriate amount of enthusiasm, time, work, determination, and, if necessary, assistance. The course is designed so that students can pass and learn if they invest the required time and work.

Academic integrity

Individuals with integrity demonstrate moral character and ethical judgment. They choose to do what is right even when facing difficult decisions or temptations. They are trustworthy, reliable, and accountable. Integrity is essential in personal relationships, professional settings, and society because it fosters trust, respect, and fairness.

We pledge to uphold the highest standards of honesty and integrity, both for ourselves and for our peers. Violations of academic integrity, including plagiarism and cheating, are strictly prohibited and may result in serious consequences, including failure of a course activity, failure of the course, and additional disciplinary action under current regulations.

Plagiarism means presenting another person’s ideas, words, analysis, code, or work as one’s own in a way that violates attribution requirements, activity instructions, or academic-integrity standards. This includes copying from textbooks, websites, online sources, generative AI tools, other students, or any other material without proper acknowledgment when attribution is required. Routine use of AI tools is allowed as explained in Tools and data science, and it does not need to be declared unless a specific activity explicitly requires it. The academic-integrity problem is not the mere use of AI; it is submitting work that students did not verify, cannot explain, or present as compliant with the instructions when it is not.

Please watch the following video from York St. John University on understanding plagiarism.

I strongly advise against constructing a piece of work by cutting, pasting, or copying material written by others into something submitted as original work. Regardless of any pressure students may feel to complete a course activity, taking this type of shortcut is unacceptable. This also applies to generative AI tools when their output is used as a substitute for understanding, verification, adaptation, or compliance with the activity instructions. Such behavior may have serious consequences.

See the following video to illustrate this point:

Ethical behavior is implicit in the mechanics and rules of the course, and it will also be discussed explicitly in several course topics. Following the instructions in this syllabus is a basic and concrete way to practice ethical behavior. Ethical concerns are inherent in business, economics, and finance because professionals in these fields frequently manage resources to achieve a range of objectives, not exclusively to maximize profits. Ethical behavior also helps build solid institutions, which is consistent with the United Nations Sustainable Development Goals, UN (2015).

Managing one’s own resources or third-party resources entails a high degree of responsibility. People may face incentives to use unethical strategies to advance their own interests. For this reason, it is necessary to discuss ethics, decision-making, and conflicts of interest in order to raise awareness among young professionals. In the end, following an ethical code as a business practice can strengthen a professional reputation, one of the most important assets students are currently building.

Take a look at this video about integrity.

Integrity is particularly important for finance professionals for the following reasons:

  1. Trust and credibility. Finance professionals handle sensitive financial information, make critical financial decisions, and often act as stewards of other people’s money. Integrity is essential to establish and maintain trust and credibility with clients, investors, and stakeholders. Clients need to trust that their financial advisor or accountant will act in their best interests, provide accurate information, and handle their funds responsibly.

  2. Ethical responsibility. Finance professionals have a significant ethical responsibility to act in an ethical and responsible manner. They must adhere to ethical codes of conduct, such as those set by professional organizations, and follow legal and regulatory requirements. Acting with integrity ensures that financial professionals prioritize ethical behavior, avoid conflicts of interest, and make decisions that are in the best interest of their clients or organizations.

  3. Confidentiality and privacy. Finance professionals often have access to confidential financial information, including personal and sensitive data. Integrity is crucial in maintaining the privacy and confidentiality of this information. Professionals must handle financial data responsibly, protect client information, and maintain the highest standards of confidentiality and data security.

  4. Risk management. Financial decisions and transactions involve risks, and integrity plays a critical role in managing these risks. Acting with integrity helps finance professionals accurately assess and communicate risks to clients or stakeholders. It involves being honest about the potential risks involved in investments, disclosing relevant information, and ensuring transparency in financial reporting.

  5. Compliance and regulatory requirements. Finance professionals must adhere to various legal and regulatory requirements in their work. Integrity is essential in complying with these regulations, reporting accurate financial information, and avoiding fraudulent or deceptive practices. Acting with integrity helps professionals maintain compliance with laws such as anti-money laundering regulations, financial reporting standards, and tax laws.

  6. Professional reputation. The finance industry relies heavily on reputation and credibility. Finance professionals with a reputation for integrity are more likely to attract clients, secure partnerships, and build long-term relationships. Conversely, a lack of integrity can quickly damage a professional’s reputation and have long-lasting negative consequences.

  7. Industry ethics and public trust. The finance industry plays a significant role in the economy and society at large. Maintaining integrity within the industry is crucial for public trust and confidence in the financial system. Finance professionals with integrity contribute to the overall reputation and trustworthiness of the industry, helping to foster a healthy and reliable financial environment.

In summary, integrity is vital for finance professionals because it helps them establish trust, uphold ethical standards, protect confidentiality, manage risks, comply with regulations, maintain a strong professional reputation, and contribute to the overall integrity of the finance industry.

Sustainable finance

I am certified as “carbon literate” by the UN Climate Change Conference and Coventry University. This certification reflects an understanding of the climate context and a commitment to identifying ways to adjust our behavior, reduce our carbon footprint, and influence our social and professional circles. In my view, learning about sustainable finance is one way to contribute positively to the environment and society.

According to the European Commission, sustainable finance refers to taking environmental, social, and governance (ESG) considerations into account when making investment decisions in the financial sector. This approach supports long-term investment in sustainable economic activities and projects. Environmental considerations may include climate change mitigation and adaptation, biodiversity preservation, pollution prevention, and the circular economy. Social considerations may include inequality, inclusiveness, labor relations, investment in human capital and communities, and human rights. Governance considerations include the management of public and private institutions, including management structures, employee relations, and executive remuneration, all of which play an important role in decision-making.

In this course, students will be introduced to sustainable finance, climate change, and the green economy. In particular, students will become familiar with basic skills and tools for applying sustainable finance mechanisms to real-world policy and business contexts.

Learning materials are taken from The One UN Climate Change Learning Partnership UN CC:Learn, a joint initiative of more than 30 multilateral organizations that helps countries pursue climate change action through general climate literacy and applied skills development. UN CC:Learn provides strategic advice and learning resources to help people, governments, and businesses understand, adapt to, and build resilience to climate change.

See the earth’s historic global average surface temperature, according to an analysis by NASA:

Learning about sustainable finance is important because it enables individuals and organizations to make informed financial decisions that consider environmental and social factors, manage risks, comply with regulations, meet investor demand, and contribute to a more sustainable and responsible financial system.