Risk Management and Modelling

"I particularly appreciated the wealth of practical experience of the teacher."

- Head of Fund Products, Switzerland
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Course Outline

This course develops a set of tools essential for the accurate management of the wide range of risks encountered in capital markets. Techniques are applied cumulatively in a sequence of workshops that include Value at Risk and its limitations, practical uses of Monte Carlo simulations and different methods for estimating default probabilities.

Who The Course is For

Traders and Dealing Room Staff
Risk Managers
Middle Office and Senior Managers
Investors
Quantitative Analysts, Financial Engineers and Systems Developers
Structured Products Desks, Product Controllers and Researchers
Loan Portfolio Managers and Fund Managers
Credit Analysts and Credit Risk Managers

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Prior Knowledge

Numerate background (intermediate)
A good grounding in capital markets products and techniques
Microsoft Excel

This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.

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Day One

Introduction and risk management toolbox

Why risk management?
Lessons from history
Risk management and the credit crisis
The limitations of models
Volatility and correlation
Quantiles
Fat tails and extreme dependency
Value-at-risk (VAR) and expected shortfall

Workshop: Characterising risk using simple distributions and studying the properties of coherent risk measures with simple examples

Market Risk

Introduction to market risk
Time horizon and confidence level
The three classic methods for quantifying market risk
Marginal and incremental VAR
Stress testing

Workshop: Calculating the VAR, marginal and incremental VAR on a simple portfolio using:

i) Variance-covariance approach
ii) Historical simulation
iii) Monte Carlo simulation

Credit risk

Issuer and default risk, default rates
Credit ratings, migration and transition matrices
Merton type approaches to assess default probability
Credit default swaps
Implied default probability

Workshop: Calculation of bond returns via transition probabilities and comparison to a normal distribution. Calculation of default probability using Merton style and market implied approaches

Day Two

Credit portfolio risk

Credit risk and double default
Credit correlation
Traditional approach to credit modelling
Credit loss distributions, credit VAR and marginal credit VAR

Workshop: Computation of credit portfolio losses and looking at the relative benefit of each asset using marginal VAR (and marginal expected shortfall)

Liquidity Risk

Introduction to liquidity risk
Empirical evidence on liquidity
Death spirals
Price impact of liquidation
Liquidity risk VAR

Workshop: Building a model to assess the price impact of a large liquidation and working out the optimal time for liquidation of a large trade

Operational Risk

Operational risk and Basel
Modelling event probability
Modelling event severity

Workshop: Estimation of operational risk VAR using Poisson distribution and EVT approach

Integration of different risk types

Combining capital numbers
Why market risk and credit risk are inextricably linked
Counterparty credit risk and CVA (credit value adjustment)
Wrong-way risk
Transformation of credit risk into market risk
Transformation of credit risk into gap risk