Fundamentals of Financial Risk Management

Objectives

The objective of the course is to offer a broad-based introduction to those risks that are most relevant to financial institutions, corporations, and organizations worldwide. During these three intensive days, the course focuses on the cornerstones in risk management: the measurement, monitoring, and management of market, credit and operational risks. 

To offer a thorough grounding in risk management, theory and practice are integrated in this course. As the course covers the latest developments in the practice of risk management, it links these developments to the newest contributions to the theory of risk management. When the course introduces complex financial ideas and concepts, a broad range of integrated practical examples, such as cases, discussions and Excel-based applications, reinforce learning and deepen understanding.

By the end of this intense three days, participants will have learned the latest practical and theoretical developments in risk management, and also gained practical experience in the measuring, monitoring, and managing risks.

Content

Day 1 – Introduction and the basics of risk

The main types of risk

• Overview of all potential risks
• The matrix of risk responsibilities
  • Where does the buck stop?
  • The stakeholders in risk management
  • Analysing a company’s risk appetite
  • Utility of loss techniques.
• Credit risk
  • What is credit risk?
  • Credit risk of long term investment positions
  • Credit risk in the trading book
• Market risk
  • Sources of risk
  • Market risk and specific risk
  • Other risks in banks (credit, operational, treasury, legal, strategy)
  • Regulatory impetus
  • Speculating on rate movements – ALCO thinking
• Operational risk
  • Defining operational risk
  • Types of operational risk
• Other risks
  • Sovereign risk
  • Liquidity risk
  • Reputational risk
• CASE STUDIES: Indentifying operational risk scenarios

The risks inherent in the financial markets and financial instruments

• Foreign exchange market - Spot, forward, swaps, and options
• Fixed income market - Loans and deposits, CDs, Treasury securities, agency securities,  forward rate agreements, swaps, caps/floors, swaptions
  • Loans and overdrafts, Trade, Project  and Mezzanine finance
  • Mortgages, prepayment, default and extension risk
  • Government, Municipal, and Corporate bonds
• Equity markets
• Derivatives markets - Forwards, futures, and options
• Commodities  markets - Agricultural, energy, and metals
• Pricing financial instruments
• Sensitivity analysis and understanding the “Greeks”
• CASE STUDY: Identifying risk in trading room

Day 2 – Market Risk

An introduction to the maths used in pricing and risk models

• Probability and statistics
• Mean and variance
• Simulation methods
  • Bootstrapping

Principles of market risk in normal market conditions

• What constitutes a normal market?
  • The assumptions
• How does market risk differ from other risks?
• Market risk terminology –  risk factors, risk accounts, risk exposure
• Measuring market risk – sensitivities
• Identification of risk factors

Value at Risk (VaR)

• Introduction and definition
• Factor analysis and mapping
• VaR Methods
  • Variance/Covariance VaR
  • Historical Simulation VaR
  • Monte Carlo Simulation VaR
• Implementation and application of VaR methods
• CASE STUDY: Calculate VaR on a portfolio of derivatives

Stress Testing, Scenario Analysis and Backtesting Risk Measures

• The role of stress testing with VaR
• Building stress tests
• Implementing scenario analysis with historical case studies
• Backtesting VaR and setting parameters
• Building a VaR Framework with stress testing, scenario analysis and backtesting
• CASE STUDY: Risk analysis in normal markets compared to abnormal market conditions.

Day 3 – Credit Risk

The use of credit ratings

• The nature of credit ratings
• The rating agencies and their procedures
• Market based credit risk models – option models and reduced models
• Internal credit ratings models

Credit events, defaults, and bankruptcy proceedings

• Overview of credit events, including default
• Bankruptcy proceedings and recovery
• Credit quality deterioration, transition matrixes
• CASE STUDY: calculating the risk of default using market information

Credit Default Models

• Overview of credit models
• Introduction to and comparison of credit model platforms (Moody’s KMV, CreditMetrics and CreditRisk+)
• Credit Default Swaps and other credit derivatives
• How the CDS market informs the credit risk manager
• CASE STUDY: Pricing a credit product from first principles

Introduction to Operational Risk

• Assessing operational risks
• The role of the Basle Accord in defining operational risks
• Key building blocks
• Measurement of operational risks

Managing Operational Risk

• Approaches to managing operational risks
• The regulatory perspective on operational risk management
• Integrating operational risk management with market and credit risk management
• CASE STUDY: Examining operational risk case studies, including Banker’s Trust, Barings Bank, Allied Irish Bank and Societe Generale

Creating a culture of risk awareness

• The importance of integrated risk management
• Building a complete risk management framework
• Examining risk management failures
• Risk reporting

The Role of Regulation

• The Basel II Accord for International Bank
• Shortcomings of the first Basel Accord
• The Three Pillars of Basel II
• Basel II Approaches to Measuring Credit, Market and Operational RiskRegulatory capital requirements and economic capital