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 2010 |
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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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