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Finance professor writes new book for new course

by Kalamalama staff


Associate Professor of Finance Gunter Meissner will use his book, Credit Derivatives – Application, Pricing, and Risk Management, in his new class, Corporate Risk Management, scheduled for fall 2005.

Meissner’s third book in his seven years at HPU, Credit Derivatives is based on the premise that the risk management divisions of national and international corporations are currently expanding due to two factors: An increase in the ability to quantify and manage corporate risk and an increase in regulatory risk-reporting requirements.


Corporate risk is divided into three types:

1) Market risk (referring to fluctuations of interest rates, currency values, commodity inventories and stock prices).

2) Credit risk (referring to loan default or rating downgrade).

3) Operational risk (referring, for example to natural disasters, technology failures, accounting errors, crime, political changes, and legal liabilities).

According to Meissner, recent new methodologies and concepts have been developed to identify, measure and reduce these.

Market risk is well understood, and many products (such as interest rate and currency futures and options) exist to manage market risk. Credit risk management however, is quite a new field. New methods and concepts as well as new products such as Default Swaps (essentially an insurance against default) and Total Rate of Return Swaps (which protects against credit risk and market risk) have emerged recently. These will be discussed and analyzed in the class. Meissner himself has created new methodologies in the field of credit risk management, which he presented at MIT, Cambridge last fall.

Operational risk is a very new field with much ongoing research. Some of this research will be conducted in Meissner’s class.

By the year 2007, every internationally active investment bank will have to report, to the regulators, VAR numbers for all three types of risk on a daily basis. A VAR (value at risk) number expresses the maximum loss due to a certain type of risk, within a certain time frame (typically one day) with a certain probability.

Hence, academics and practitioners are currently trying to find methods and algorithms to derive the VAR numbers. This is especially difficult for credit risk and operational risk, since these types of risks are difficult to quantify. Solutions to these problems will be derived and analyzed in class.

According to Meissner, several of his former students are already working in risk management in New York and London. “With this new class,” he said, “hopefully more HPU students will find excellent careers in the field.”


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