Market Risk Measurement and Management

Introduction

The aim of this seminar is to introduce participants to the nature of market risk and how it is measured and managed under the Basel II regulations.

Key features include:

• why banks trade in the market, market instruments, market trading and the risks these activities generate
• the Basel Accord and the regulation for market risk measurement, management, supervision and disclosure
• an explanation of Value at Risk (VaR) the most commonly used method of measuring the market risk within a trading portfolio
• best practice for market risk management and supervision.

Objectives

At the end of this seminar participants will have a basic understanding of:

• the treatment of market risk under Basel II
• the risks and features of common market instruments
• the pricing and mark-to-market process
• the different approaches to measuring market risk
• managing market risk
• capital, supervision and disclosure

This course is intended those either new to risk management, trading and market operations, or who wish to gain an understanding of risk-based regulation and how they are applied to traded markets. It will be of use to:

• risk managers and analysts
• investment banking professionals
• treasury professionals
• balance sheet and capital managers
• asset and liability managers and analysts
• middle and back office personnel
• internal and external auditors
• it and operations professionals
• regulators and supervisory professionals
• business managers and team leaders
• anyone new to risk management within financial services
• suppliers and consultants to banks and the risk management industry.

Pre-requisites

No prior experience of risk-based management, of the Basel II Accord, or of market trading is required as this course first covers the basics before moving on to more advanced topics. However it is assumed that all delegates are familiar with common financial terms and have a basic understanding of banking and the functions of a financial institution. 

Content

Day 1 – Understanding trading and market risk     

Defining market risk  

• The Basel I Accord and the Market Risk Amendment
• The Basel II Accord
• What is market risk?
• Specific risk
• General risk
• Why trade – the up side and the down side?
• Trading strategies
• Liquidity risk

Types of market instrument

• Cash instruments
  • Foreign exchange - Spot and Forward
  • Foreign exchange swaps
  • Loans/deposits
  • Certificates of deposit
  • Bonds
  • Equities
  • Commodities
• Derivative instruments
  • Forward Rate Agreements
  • Swaps
  • Options
• Repo
• Example/case study

Pricing and mark to market      

• Factors affecting an instrument price
• Yield curves
• Pricing foreign exchange and futures instruments
• Bond pricing
• Equity pricing
• Options pricing and volatility
• Why mark-to-market?
• Mark-to-market procedures
• Example/case study

Day 2 – Managing market risk and Basel approaches to measurement

Managing market risk and capital

• Managing market risk strategies
• Limits
• Technology
• What can go wrong?
• Case study
• Measuring capital
  • Economic capital
  • RAROC
  • Capitalising risk

Calculating market risk capital under Basel

• Market risk in Basel I and II
• Capital under Basel II
• Approaches for measuring market risk capital
  • Risk measures
  • The Basel Approaches
• Obtaining approval for using a measurement approach
• Examples

The Standardised Approach for measuring market risk

• Interest rate risk
• Foreign Exchange risk
• Equity risk
• Commodity risk
• Options
• Example

Day 3 – The advanced approach to measuring market risk, supervision and disclosure

Understanding Value at Risk (VaR)

• An outline of Value at Risk models
• How VaR works
• VaR caveats and assumptions
• What VaR does not do
• What are the alternatives to VaR
• Examples

The Internal Model Approach for measuring market risk.  

• The Internal Model Approach
• Obtaining approval for an internal model
• Stress testing and scenario testing
• Backtesting
• Data requirements and issues
• Examples

Market risk under pillars 2 and 3             

• What is supervision and disclosure?
• Home/host supervisory co-operation
• Supervision of market risk
• The role of internal and external audit
• Pillar 3 and “Market Discipline”