Effective Application of Value-At-Risk Methodologies Workshop

2 DAY WORKSHOP
(Workshop is not being offered at this time)

Qualifies for continuing education credits:

• CPE: 19.2
• CFA CE: 16
• CPD

INTRODUCTION

Value-at-Risk (VaR) is the most commonly used measure of financial risk, with broad applications to many areas of financial risk management. Effective use of VaR methods requires a detailed understanding of its meaning, strengths, weaknesses and implementation issues. This intensive and highly interactive course includes the latest practical and theoretical developments in VaR calculation and extensive Excel implementations, practical case studies, and group activities.

Who should attend?

This course is designed for professionals working in the areas of banking, risk management, risk measurement, regulatory compliance, investment management, quantitative analysis, and portfolio management.

What will you get out of this course?

• Gain a detailed understanding of Value-at-Risk methodologies and its role in risk measurement

• Understand the practical issues with implementing Value-at-Risk methods in your risk management program, including backtesting, interpretation and analysis of results, strengths and weaknesses

• Learn about the relationships between Value-at-Risk measurements and other risk measures including price sensitivity and expected shortfall

• Practical demonstrations of the above will be given in Excel spreadsheets that delegates will be able to use after the course

COURSE OVERVIEW AND OUTLINE

For this intensive and highly interactive course, all delegates are strongly recommended to attend the workshop with a laptop computer loaded with Microsoft Excel.

Section 1 – Principles of market risk

• Nature of market risk. How is it different from other risks

• Terminology of market risk: Risk factors, risk accounts, risk exposure

• Focus on market risk

• Sensitivities – the first attempt to measure market risk

• Identification of risk factors

• Commonly used sensitivity measures: Examples

• Risk measures for fixed income instruments

• Examples of the sensitivities calculation for different markets. How specific features of financial instruments and markets influence their market risk

• Sensitivities and market risk of an option contract (BS model)

• INTERACTIVE GROUP SESSION: Perform calculation of the Greeks and of option price changes for various shifts in underlying factor using delta and delta/gamma approximation methods. Determine accuracy of Greeks approximation and limits of their applicability

Section 2 – Sensitivity as a market risk management tool – loss-based approach to market risk measurement

• Applying the sensitivities concept to measure and manage market risk

• Using sensitivities to measure the market risk of a portfolio

• Sensitivities as risk management tool: Advantages and shortcomings

• Market risk as a possible loss. General framework of the method

• Volatility of market factors as the driving force of the risk

• Forecasting market values using volatility clustering

• INTERACTIVE GROUP SESSION: Statistical analysis of time series of market factors

Section 3 – Modeling probability distributions of changes in market factors

• Selecting the methodology to model the distributions: Theoretical vs. empiric approaches

• Most important input parameters of the model: Holding period, look-back interval

• Requirements for the quality of historical data used for the modeling. Common problems with the data

• Parametric and non-parametric models for the distribution and their most popular implementations: Variance/covariance, Monte Carlo, and historical simulations models

Section 4 – Backtesting

• Optimal look-back interval – does it exist? How to find the right interval

• INTERACTIVE GROUP SESSION: Using backtesting to identify the best distribution model: parametric vs. non-parametric approach

Section 5 – Calculation of VaR in historical simulation framework

• Four steps of VaR calculation

• INTERACTIVE GROUP SESSION: Calculation of P/L vectors for option by using the position sensitivities and by using full valuation approach

Section 6 – Comparing model-based and non-parametric VaR models. Market risk and market risk capital Basel II

• Comparing results of the two methods. The methods strengths and weaknesses

• Aggregation of market risk for portfolios of financial instruments VaR calculation using parametric and non-parametric methods

• Comparison of variance/covariance, Monte Carlo, and historical simulations methodologies

• Market risk capital and VaR

• BIS on minimum requirements for market risk capital

Section 7 – Comprehensive market risk measurement: Scenario analysis and stress-testing

• Methods and tools of optimization of VaR exposure: component VaR

• VaR-based market risk limits

• VaR and catastrophic market risk. Stress-testing

• Measuring and managing two types of market risk: “Business-as-usual” and catastrophic risk”

• Scenario Analysis: The third component of the comprehensive risk management

• INTERACTIVE GROUP SESSION: Development of stress scenarios

Section 8 – Beyond “normal” VaR: Extensions of the VaR methodology

• Normal markets – what is it

• Market risk for longer holding periods. Three models to extend holding period beyond one day

• Market risk measurement in illiquid markets

• Advantages and limitations of VaR-based risk measurement

• Market risk insurance or expected shortfall – an alternative statistical measure of market risk