Delegates

·      Risk Managers

·      Fund Managers

·      Compliance Officers

·      Dealers

·      Auditors and Accountants

·      IT executives selling or designing systems in this area

By the end of the course participants will be able to understand:

• The main categories of financial risk:

-market or price risk (eg equities and FX)

-settlement risk

-rates risk (fixed income)

-credit risk, idiosyncratic and systemic

-counterparty risk (the interaction of for example, rates and credit risk on a swap)

-correlation risk

-option risks (principally gamma and vega)

-operational risk

• The approaches to quantifying them and their drawbacks:

-fundamental analysis (in brief)

-Value at Risk (VaR) including regulatory VaR and its weaknesses

-default and recovery rates and expected loss

-correlation exposure

• The approaches to managing them and their drawbacks:

-credit spreads

-hedging, for example with derivatives, and the risks this brings

-margining and clearing houses

-exposure limits

-portfolio diversification

-economic capital and for banks regulatory capital, the Basel Accord

 

Content

• Risk types

-Market/price risk – examples

-Settlement risk - examples

-Rates risk and how it arises with fixed as opposed to floating rate debt instruments

• the yield/price calculation
• yield as compensation for perceived risks
• why yields vary

 

-Credit risk (single entity): default and recovery rate risk

-Counterparty risk – how this can arise with a swap

-Correlation risk

• examples from equity and credit portfolios
• most investors are exposed to a rise in correlation

-Option risks

• The key pricing inputs; above all, volatility
• Implied volatility
• Negative gamma – the risks of dynamic delta-hedging short positions
• Vega and the impact of a change in implied volatility

-Operational risk - examples: systems failure, rogue trader etc

• Approaches to quantifying risk and their drawbacks

-Market/price risk:

• Fundamental analysis (in brief)
• Value at Risk
  • How it is calculated
  • Regulatory VaR for banks
  • Its weakness

-Credit risk

• Fundamental analysis (in brief)
• Calculating expected loss from Rating agency historical statistics for default and recovery rates
• Calculating implied default rates from bond and Credit Default Swap (CDS) spreads
• Default correlations: the difficulties and weaknesses of calculating and using them

-Counterparty risk: calculating potential credit exposure on a swap – the interplay of yield volatility, duration and credit risk

-Options risk:

• calculating gamma and vega
• negative and positive gamma and vega

-Operational risk: the difficulties of quantification

 

• Approaches to managing risk and their drawbacks

-Market/price risk

• Portfolio diversification
• Residual risk
• Hedging: eg puts and their drawbacks

-Rates risk:

• Hedging with swaps
• Margining
• Exposure limits
• Economic capital

-Credit risk

• Charging a credit spread greater than expected loss
• The impact of competition
• Hedging: CDSs and their drawbacks

 

Basle II – its requirements and drawbacks