Financial Risk Management Overview


The lack of a government rescue for Lehman jolted all financial professionals into a greatly heightened perception of risk.  Risk comprises both known unknowns and the unknown unknowns. The former could be handled, the latter are impossible to deal with.  This course assists financial professionals in many different roles and areas to identify the key risks of the main types of Equities, Fixed Income and Derivative instruments and the approaches to quantifying and then trying to manage the various risks and their weaknesses.  The course assumes an understanding of the fundamentals of equities, fixed income, swaps and options.



      Risk Managers

      Fund Managers

      Compliance Officers


      Auditors and Accountants

      IT executives selling or designing systems in this area

Learning objectives

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



  • 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



Todays Date:

Duration 1 day
Available as an in-house course. Details on request.

Investment Education PLC
45 Old Hall Road, Manchester M7 4JF, United Kingdom
Tel:+44 (0)161 832 3800
Registered in England Number 2129160
VAT Registered Number GB 480 2112 85

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