MSM-Finance Risk Management Capstone Projects

Bank on Risk Management Capstone

MSM-Finance students work with a variety of clients, from banks to hedge funds. The work they accomplish is hugely valuable to these institutions. Below, Peter Ritchken shares more on the Projects in Risk Management capstone.

Q: Can you describe a typical project?

A: We work a lot with financial institutions, hedge funds, and investment management firms. In summer 2011, for example, one team worked on risk management issues associated with a bank's large but complex portfolio of mortgage-backed security products. We were asked to develop the appropriate financial tools to assist in identifying and managing the interest rate exposure associated with some of the collateralized mortgage obligations (CMOs). Of course, the bank already had products and tools to facilitate this risk measurement. But they were curious to see if we could develop appropriate models that would reinforce the results of their current approaches-or produce results that deviated from the outputs of their models. To develop the software that the bank wanted, the team developed a dynamic interest rate model, a pre-payment model, and a model that could evaluate rather complex tranches associated with pools of mortgages. The challenge was to create models that faithfully represented reality without creating excessive complexity for the parameter estimation.

Q: How did the team create those models?

A: They used Visual Basic to create the models, estimated appropriate parameters, and conducted extensive simulation tests. They then implemented the models on a sample of complex CMOs and presented the results of the risk assessment to management. By the way, all of this was accomplished in an incredibly tight time frame: under five weeks! Senior bank management immediately extended internships to three of the students who were available. They were impressed not only with the individuals but with their effectiveness as a team. The students are actually still working in those internships. I would not be surprised if all three received full-time job offers. The process of researching and completing these projects really binds our program more tightly with our partnering institutions. Each year, we seem to work together even better. So the other good news about this project is that the firm in question initiated a second project with my class this semester! That says a lot about the value the bank got out of working with our students.

RISKY BUSINESS