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Risk Management for Financial Institutions

Day One

Introduction to Financial Risk Management

  • Types of Financial Risk
  • Role of Risk Management
  • Lessons from the past
  • Warehousing and Hedging Risk
  • Desk level and firm-wide risk reporting
  • Defining trading books and trading desks

Tools of the Trade

  • Movement of financial assets
  • Introduction to volatility and correlation
  • Role of correlation in risk management
  • Failure of volatility and correlation
  • Introduction to concepts from probability
  • Quantiles and Percentiles
  • Histograms and historic distributions

Workshop: Computing volatility, correlation and percentiles

Describing Risk with Greeks and Setting Risk Limits

  • Revision on basic Greeks
  • Using Greeks to explain P&L
  • How traders use Greeks to manage risk
  • Vega as a risk sensitivity
  • Sensitivities to curves and surfaces
  • Cross risk and higher order sensitivities
  • Expressing risk as tradeable instruments
  • Combining risk into risk reports
  • Setting and monitoring risk limits

Workshop: Hedging and combining risk

Day Two

Market Risk and Credit Risk

VaR and Expected Shortfall

  • Techniques for forecasting future losses
  • Introduction to market risk
  • Problems with VaR
  • Coherent risk measures
  • Expected shortfall (ES)
  • Variance-covariance approach
  • Historical simulation
  • Monte Carlo simulation
  • Identifying trades to reduce VaR
  • Backtesting and procyclicality

Workshop: Using historical simulation to calculate VaR and ES

Scenario Risk Management, Stress Tests and Crisis

  • Differences between stresses and scenarios
  • Relationship between scenarios and Greeks
  • Interpreting scenario risk reports
  • Scenarios in more than one variable
  • How scenario reports change through an expiry
  • Benefits of looking at stress reports
  • Lessons from history
  • Liquidity in times of stress

Introduction to Credit Markets

  • Drivers of credit markets
  • Describing probabilities of default
  • CDS spreads, recovery and default
  • Market implied probabilities of default
  • Credit grade migration
  • Structured Credit products – CDO and first to default

Workshop: Using a transition matrix to determine the cumulative probability of default

Day Three

Counterparty, Liquidity and Operational Risk

Counterparty Risk

  • Introduction to counterparty risk
  • Examples of transactions with counterparty risk
  • Margining and dealing on exchange
  • Wrong way and right way risk
  • Measuring counterparty risk
  • Concept of potential future exposure
  • Exposures of some commonly traded products
  • Incremental and margin credit exposure

Workshop: Calculating potential future exposure, CVA and marginal CVA for a portfolio of options

Liquidity Risk

  • Types of liquidity risk – funding and market
  • Funding liquidity – margin requirements and broker lines
  • Hedging illiquid variables
  • Models for market liquidity
  • Liquidating large portfolios

Workshop: Optimal liquidation of a large portfolio

Operational Risk

  • Examples of operational risk
  • Sizing the problem
  • Methods of assessing the risk
  • Extreme value theory and its applications
  • Calculating operational VaR

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