Measuring and Managing Market Risk

• Introduction to Market Risk
• Measuring Equity Risk
• Measuring FX Risk
• Measuring Interest Rate Risk
• Measuring Energy and Commodity Risk <
• Measuring Portfolio Risk and Value-at-Risk
• Using Derivatives to Manage Market Risk

Over the past decade, capital market financing has increasingly replaced the more traditional ways of financial intermediation. In turn, this has made financial institutions as well as corporations more vulnerable to market risk. At this course, we shall present and discuss the state of the art techniques of measuring and managing this type of risk. We shall start with a general definition of "market risk", and we explain how this type of risk correlates with other types of risk. We then look at how the various types of market risk are measured at the single-position as well as the portfolio level. We start with equity risk, explaining the difference between systematic and unsystematic risk and important key ratios such as "beta". We then show how FX risk is measured, from an "economic" as well as an "accounting" perspective. Further, we give an in-depth explanation of how interest risk is measured. We present and interpret important key ratios such as duration, modified duration, BPV, convexity and key rate duration, and we explain the use of these key ratios in risk management. We also briefly discuss how energy and commodity risks are measured. Further, we show how market risks are measured at the portfolio level, carefully explaining important concepts as "correlation", "diversification" and "marginal risk". We shall also present and examine the concept of "Value at Risk", which is widely used by financial institutions as a measure of aggregate risk. Finally, we explain how market risk can be managed using derivatives. We give an overview of the different types of derivatives and discuss their advantages and disadvantages. Using practical examples, we demonstrate how derivatives are used to mitigate the various forms of market risks at the single instrument as well as the portfolio level.

• Price and Yield Analysis
• Duration Analysis
  • Macaulay Duration
  • Modified Duration
  • Dollar Duration
  • BPV
• Interest Rate Volatility
• Bond Price Volatility
• Leverage and Interest Rate Risk
• Measuring Yield Curve Risk
  • "Bucketing"
  • Key rate duration
• Measuring Interest Rate Risk Using the Basel Duration Method
• Exercises

12.00 - 13.00  Lunch

13.00 - 16.30  Measuring Value-at-Risk

• What is "Value-at-Risk"?
• Uses of VaR in Risk Management
• Ways of Measuring VaR
  • Parametric VaR
  • Non-parametric VaR
  • Historical simulation
  • Monte Carlo simulation
• Calculating VaR for Linear Exposures
  • VaR for stock , bond and FX positions
  • VaR for linear derivatives
• Calculating VaR for Non-linear Instruments
  • Delta/normal approach
  • Delta/gamma approach
  • Full valuation approach
• Using VaR for Basel Reporting
• Exercises

Day Three

09.00 - 09.15  Recap

09.15 - 12.00  Using Derivatives to Manage Market Risk

• Introduction and Overview
• Why Derivatives are Useful in Risk Management
• The Hedging Process
• Using Forwards and Futures to Manage Market Risks
  • Calculating the hedge ratio
  • Case: hedging stock portfolio with stock index futures
  • Case: hedging bond portfolio with bond futures
• Using Options to Manage Market Risks
  • Hedging downside risk and contingent exposures
• The Effect of Hedging on VaR
• Exercises

12.00 - 13.00  Lunch

13.00 - 14.45  Using Derivatives to Manage Market Risk (continued)

• Using FRAs, Swaps and Interest rate Options
  • Hedging "repricing" risk
  • Hedging IRR and FX risk with asset and liability swaps
• Managing Derivatives Risks
  • Risk warehousing
  • Managing counterparty and settlement risk

15.00 - 16.00  Test - PRMIA/FRM Style

16.00 - 16.30  Recap, Evaluation and Termination of the Seminar