Risk Management in Finance

This extensive three day program begins with an introduction to financial risk management including lessons from the past and the implications for managing risk at both a firmwide and desk level. After gaining a tool kit of practical techniques, the delegates will then learn how to apply these in a variety of risk management situations. This includes describing market risk with Greeks, as well as combining risk across traders and trading desks to produce meaningful risk reports. This is then extended into an analysis of the process of setting and monitor risk limits.

Day two focuses on Market and Credit risk. The concepts of VaR and expected shortfall are introduced with a focus on the interpretation of these common risk measures. Advantages and problems with different methods of calculation of VaR and expected shortfall are onsidered in some detail. This moves on to consider risk management in times of crisis including scenario risk management and stress testing. The credit section includes understanding the drivers of credit risk and credit markets, recovery, and the probability of default, and finally the complexities introduced by structured credit products.

The third day focuses on Counterparty, Liquidity, and Operational Risk. In particular, the course covers current best practice in counterparty risk management including setting exposure limits, potential future exposure, and wrong way risk. Both market and funding liquidity are considered. Techniques are explored to measure these risks and manage exposures during periods of market illiquidity. Finally the issue of operational risk is covered. Consideration is given to the different sources of operational risk, and techniques that can be used to measure and minimize this frequently forgotten risk class.

• Risk managers
• Fixed Income, FX, Credit and Equities traders
• Bank treasury professionals
• Finance
• Internal Audit
• Senior management

• Gain familiarity with the various different types of financial risk at a firmwide and desk level
• Be able to describe risk with Greeks and set risk limits
• Learn about market risk, credit risk, VaR, scenario risk management, and stress testing
• Understand counterparty, liquidity, and operational risk and how these impact a variety of different financial institutions

Basic understanding of financial markets.

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

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

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