Balancing risk and reward is the job of all managers. Unfortunately,
they may not always be successful and we have all heard of Amaranth,
Barings, Long Term Capital Management and others. International
financial regulators in conjunction with the Bank for International
Settlements (BIS) have recommended policies to minimize these
occurrences and protect investors.
This two-day program will alert participants to varieties of risk at
portfolio and enterprise level, estimating its impact, and best
practices for managing it.
It is not aimed at financial engineers looking for hedging and trading
strategies, but for those managers responsible for implementing
risk systems or understanding the risk reports they are given. It
gives participants an understanding of Value at Risk (VaR) measures and
their interpretation. It is a pragmatic course aimed at practitioners
who must deal with regulators, board members or senior management. It
will assist the manager in evaluating risk adjusted performance of
staffers and profit centers. It does not require advanced mathematical
expertise, but relies on middle school algebra and basic statistical
concepts.
Several cases will be examined and implications identified. Excel
spreadsheets will be provided so that participants can review concepts
demonstrated in class. All class notes and readings are provided,
including a guide to additional sources, (i.e., books, articles and
websites).
Syllabus
Background
- What risks can we manage?
- Categorize and define market, credit,
liquidity, model and operational risk
- Importance of context in defining risk
Case: Barings Bank – How a sophisticated 22- year old international
bank was brought down. What happened, how it happened and what lessons
can we learn from their experience.
Review
- Modern Portfolio Theory
- What's wrong with the efficient
market hypothesis
- Behavioral Finance
- Statistics
- Probability Theory
Regulatory Environment
- Why regulate? Who is being protected?
- Basel II Accord – What is it? Who
created it? Who does it impact?
- How do we satisfy its requirements -
best practices?
Case: AllFirst (AIB) – How did a Maryland bank lose $650M while under
US regulation? How this case compares to Barings and the previous
lessons learned?
Value at Risk
- What is Value at Risk (VaR)? How to
calculate it for a single security
- Calculating VaR parametrically
- Aggregating VaR over different time
horizons
- Excel exercise to graph
volatility, calculate VaR
- Risk Adjusted Return on Capital
(RAROC)
Advanced Value at Risk
- Back testing - how good is your VaR
model?
- Calculating multi-asset (portfolio)
VaR
- VaR decomposition – marginal VaR to
identify the impact of changes to a portfolio
Excel exercise 2 asset VaR and VaR decomposition
- Comparing VaR calculation
methodologies
- What is Monte Carlo simulation and
how is it used?
- Excel exercise to create a Monte
Carlo simulation of stock prices
Case: Baring’s revisited – What VaR would tell us about Nick Leeson’s
portfolio
Extreme Events – Worst Case Situations
- Fat tail (worse case) analysis using
GARCH and Extreme Value Theory (EVT)
- Stress testing
- Model risk
- What's wrong with VaR?
- Multifactor Risk Models – calculating
VaR using relationships and themes
Credit Risk
- What is Credit Risk? What are the
different types?
- Estimating probability of default
(PD)
- Transitional Models - Credit Metrics
- Credit rating models
- Subjective – CAMEL or the 5 C’s
- Objective – Z score,
CreditMetrics, KMV, Kamakura
- Merton and Kamakura models
- Basel II capital requirements for
credit risk
- How credit default swaps work
- Collateralized Debt Obligations
(CDOs)
- What caused the credit meltdown?
Liquidity Risk
- Liquidity risk is the hidden killer
- Market impact in trading
- Impact of leverage
- Hedge fund reporting measures and
suggested models
Case: Long Term Capital Management – How did a firm filled with experts
and two Nobel Prize winners almost bring down the worlds financial
systems? What new lessons have we learned?
Operational Risk
- What is the BIS definition
- Categorizing op risks: Key Risk
Indicators (KRIs)
- Basel II Op Risk best practices
Wrap up, summary and sources of further
information.
To register for public courses follow this link:
New
classes in 2012 |
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"Very informative
session with a great presentation style. Really great breadth of
coverage."
"Terrific course. I learned more relevant material than I
anticipated. Would recommend to others."
"This was a very intelligent course – combining a great deal of
information with humor, anecdotes and examples that demonstrated the
point/concept. "
"Thank you for the wonderful training session. This training is just
what is required for people who come from a non-financial background."
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