Introduction

• Overview of current markets and fallout from the credit crunch/GFC and QE
• The basics of risk management – What is it? What isn’t it?
• Identification, measurement and management of risk
• Market risk
• Credit risk
• Operational risk
• Other risks
• Valuation, mark to market and accruals, banking book/trading book split
• What do we mean by manage?
• What is risk management trying to achieve?
• Regulation vs. risk management – Aren’t they trying to do the same thing?

Market Risk in Banking

• Importance of basic control processes
• Mark to market, mark to model other valuation
• Profit and loss monitoring
• Limits
• Assets and liability (inventory) control
• Organisational culture and structure
• The tone set by senior management
• Staffing and experience
• The importance of systems
• Banks vs. other corporate entities – Why are they different?

Risk Management Tools for Market Risk

• Defining a returns process for a price series
• Modelling the returns process
• Asset/liability size and equivalents
• Sensitivities of positions to market moves – The concepts of delta and DV01
• Arbitrage principles for pricing and sensitivities – Forward pricing and probability

Portfolio Market Risk Tools

• Aggregation of positions – From the many to the few
• Portfolio effects from correlation and diversification
• Composite risk measures
• VaR and other portfolio risk models

VaR and Its Short Comings

• Variance-Covariance
• Historic simulation
• Monte-Carlo
• Limitations of approaches
• Handling specific risk
• Problems with illiquid assets
• Changes in volatility and covariance assumptions
• Why might “Expected Shortfall” be better?
• What might the “Fundamental Review of the Trading Book” bring?

Adjuncts to the VaR Tools

• Using scenarios to identify “problem” positions
• Stress testing – What is it and how does it help?

New Products and New Challenges

• How do we incorporate new products?
• Breaking down the components of risk
• Use of models
• Incorporating into existing system and not-in-system trades for reporting
• How do we cope with non-modelable risk?
• How do we cope with risks not in VaR?

What Can Derivatives Tell Us About Market Risk?

• Implied volatility, skews and smiles – What do they mean?
• Fat tails and market instabilities
• What do real returns look like?
• How should we adjust measures?

Market Risk for Fund Managers

• Why is Fund Management different?
  
  • traditional fund manager vs. hedge funds
• The role of benchmarks and mandates
• Alpha, Beta, Information and Sharpe Ratios – What do they tell us?
• Benchmark relative risk
• Non linear beta effects
  
  • managing liquidity risk for funds – how do investors get in and out?
  • why is it easy to be misled by a good track-record?

The Role of Back Testing for VaR

• Explaining the sources and sinks of profit and loss from risk measures
• Back testing process – Clean, dirty and hypothetical P&L
• Exceptions – How many is too many or too few?
• Model hypothesis testing
• Effects of auto correlation
• The role of Extreme Value Theory (EVT) for tail correction

Market Risk Capital

• The evolution of Basel capital requirements for market risk
• The 1996 market risk amendment and introduction of internal models
• Quantitative and qualitative aspects of model recognition
• Defining market risk capital and qualifying capital types – Tiers 1, 2 and 3
• Recent developments such as liquidity risk and leverage limits – What is Basel III bringing?
  
  • what will the FRTB (aka Basel IV) bring?