Mastering Risk Management

Overview of Banking Risk

• Definition of risk and uncertainty
• The dimensions of risk
• Market risk: FX, I/R, equity, commodity, basis, and volatility risks
• Credit and counterparty risk
• Liquidity risk
• Operating risk – including fraud and settlement risk
• Legal, regulatory, and political risk
• The risk / return trade-off

Review of Statistical Concepts

• Statistical distributions
• Mean, variance, standard deviation, skewness and kurtosis
• Probability distributions
• Mastering the Normal distribution
• Confidence intervals
• Volatility
• Correlation and auto-correlation
• Calculating Volatility from Market Data

Pricing Principles for Financial Products

• FRAs
• Swaps
• Options
• Why options behave differently
• Option pricing models – how do they work?
• The "Greeks" for options
• Market risk for financial products
• Symmetrical vs. non-symmetrical products
• Pricing Options

Overview of VaR

• Objective of Value At Risk (VaR)
• Establishing confidence intervals
• Principles of calculating VaR
• Methods of calculating VaR
• The variance / covariance (parametric) approach
• The Monte-Carlo risk approach
• Using historical simulation
• Stress-testing and scenario analysis

Implementing VaR

• Principles
• Choosing a confidence levels (5%?, 1%?, 0.0001%?)
• Choosing a time horizon (1d?, 10d?, 30 days?)
• Gathering risk data
• Full valuation vs. parametric approaches
• Implementing the variance / covariance approach
• Historical simulation
• Choosing scenarios for Monte-Carlo and stress-testing
• Comparing methodologies
• Verifying VaR
• Back-testing and model validation
• Expected Shortfall
• Calculating VaR using the Historical Simulation approach

VaR for a Portfolio of Instruments

• Combining and integrating risk exposures
• Portfolio risk and correlation concepts
• Components of portfolio risk – the Greeks again
• Risk managing the entire portfolio
• Additive, non-additive, and offsetting risks
• Managing a portfolio of linear instruments
• Managing a portfolio of non-linear instruments
• Special problems caused by convex products
• Correlations between interest rates, currencies, and other financial risk dimensions
• Calculating VaR for a Banking Portfolio

The Basel Market Risk Amendment and FRTB

• The Basel Accord for Market Risk
• The standard model
• Using internal models
• Qualitative standards for internal models
• Calculating VaR using internal models
• The multiplier, "yellow cards", and the "red card"
• Stress testing
• The Fundamental Review of the Trading Book (FRTB)
• Revised Internal Models Approach
• Revised Standardised Approach
• Revised boundary between trading and banking books
• Adoption of Expected Shortfall
• The meaning of: DRC, RRAO, ES, SES and other acronyms
• Default risk
• Stress testing
• Workshop: Calculating market risk

Review of Credit Risk

• Definition of credit risk
• Sources of credit risk: bank lending, LCs, money market and bonds, derivatives
• Country and counterparty risk
• Measuring credit risk: traditional methods
• Measuring credit risk for financial products
• Z-score and similar statistical approaches
• Credit ratings and methodology

Credit Risk and Credit VaR

• Default risk and equity prices – the KMV approach
• Determining expected default frequency (EDF)
• CreditMetrics
• Calculating value volatility and Credit VaR
• Choice of time horizon for Credit VaR
• The transition matrix
• Estimating migration probabilities
• Markov processes and chains
• Modelling recovery rates and credit spreads
• Determining correlations from equity data
• Standalone risk vs. portfolio risk
• Monte-Carlo methodology
• CreditRisk+
• Comparison of different credit models
• Measuring Credit Risk for a Loans Portfolio

Credit Derivatives

• Principles and functions of credit derivatives
• Types of credit derivatives
• Credit default swaps
• Index products
• Pricing CDS
• Using CDS to reduce credit exposure

Mitigating Counterparty Risk

• Monitoring and controlling counterparty risk
• Netting
• Collateral management
• Settlement – delivery versus payment
• Using credit derivatives to modify risk profile

Basel III and Credit Risk

• Basel III
• Pillars I, II, and III
• Menu of approaches
• Standardized vs. Internal Ratings Based (IRB) approaches
• Foundation vs. Advanced IRB approaches
• Tier One, Tier Two, and RWA
• Using internal credit models
• Allowance for credit risk mitigation
• Use of credit derivatives
• Collateralization
• Operational risk
• The Capital Conservation Buffer
• The Countercyclical Buffer
• Workshop: Calculating capital for credit risk

Management and Current Issues

• Segregation of discretion and responsibilities
• Role of senior management
• What do the numbers really mean?
• Limits of VaR – what VaR can and cannot achieve
• The credit crisis and its implications
• Global risk management
• Risk-adjusted and capital-adjusted profit and performance measures
• Efficient allocation of capital and risk resources
• Examples of best practices
• Situations to be avoided (and how)
• Lessons to be learned from recent financial disasters
• Risk management in the future