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Financial Risk Management - Methods, Tools, Regulation and Control

Duration: 3 days
  • Understanding Financial Risks and their Interactions
  • Market and Regulatory Developments in Risk Management
  • Market, Credit and Liquidity Risks
  • Sovereign Risk
  • Value-at-Risk and Stress Testing
  • Hedging Financial Risks
  • Practical Implementation and Control
The objective of this seminar is to give you a good and practical understanding of financial risks and of methods and tools for managing these risks under normal as well as stressful market conditions such as those that we have experienced over nearly a decade.

We start with a general introduction to risk management, and we discuss why sound risk management practices is today more important than ever. We explain how globalization, financial innovation, risk “mutation”, tighter integration, the increasingly “systemic” nature of risk, and regulatory changes have made risk management more challenging.

We then give you a thorough review of the different types of risk that financial institutions, investors, borrowers and corporations face: market risk, credit risk, sovereign, and liquidity risk. We carefully explain the various forms of each of these major risk categories, and we illustrate – using real life case studies from the crisis that has ravaged financial markets in recent years – how negative risk outcomes can lead to disastrous financial consequences.

Further, we present and explain a number of quantitative techniques for measuring and managing financial risk. Models include “single-factor” models such as duration and beta based risk assessment, and more sophisticated, multi-factor models. We also explain how to calculate value-at-risk for single positions and for portfolios, and we discuss the pitfalls and limitations of using value-at-risk as risk measure. We explain the importance of managing “tail risks” and of performing rigorous “stress testing”. Further, we present methods for quantifying credit risk, including the widely used “Merton-style” structural models, and we explain how to assess liquidity risk using techniques for projecting deterministic and stochastic cash flows.

Finally, we present and explain a number of risk management strategies and explain how they can be implemented and controlled in practice. Strategies include risk monitoring, limit setting and limit controls, hedging with derivates and immunization. We further discuss the impacts of new regulation such as Basel III/CRD IV and EMIR on Risk Management 

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Financial Risk Management

  • The Importance of Financial Risk Management – Lessons from the Great Recession and Sovereign Debt Crisis
    • What Went Wrong, and What Have We Learnt?
  • The Changed Assumptions about Risk Management
    • Globalisation of Financial Markets and Economic Imbalances
    • Financial innovation and Increased Complexity
    • Integration and Mutation of Financial Risks
    • The “Great Deleveraging” During the Global Credit Crisis
    • The "Reach for Yield" and the Risk of New Bubbles 
    • Systemic Risks and Regulatory Reform

12.00 - 13.00 Lunch

13.00 - 16.30 Understanding Financial Risks and their Interactions

  • Overview of Risks and their Interactions
  • Market Risks
    • Interest Rate Risk
    • Equity Risk
    • FX Risk
    • Volatility Risk
    • Potential Future Exposure
  • Case Studies - Market Risk Related Crises and Break-downs

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Financial Risks and their Interactions (Continued)

  • Credit Risks
    • Classic Credit Risk and Counterparty Risk
    • Sovereign Risk
    • Credit Spread Risk
    • Settlement Risk (Herstatt Risk)
    • Case Study: The Subprime Crisis and Its Impact on Financial Institutions and Markets
    • Case Study: Counterparty Risk, Lehman Brothers and AIG
    • Case Study: The European (Global?) Debt Crisis
  • Liquidity Risk
    • Funding Liquidity Risk and Market Liquidity Risk
    • Liquidity “Black Holes”
    • Case Studies: LTCM, Bear Stearns, Northern Rock, Lehman
    • The Regulatory Response: New Basel Liquidity Ratios (LCR and NSFR)
  • Workshop: Identifying Financial Risk from Balance Sheet and Supplementary Data

12.00 - 13.00 Lunch

13.00 - 16.30 Quantitative Techniques for Risk Measurement and Management

  • A Generic Model for Measuring Market Risk
  • Models for Measuring Market Risk
    • Duration and Key Rate Duration (Interest Rate Risk)
    • Beta and Multifactor Models (Equity Risk)
    • Measuring Portfolio Risk
    • Measuring and Interpreting “Value-at-Risk” (VaR)
    • Pitfalls and limitations of Using VaR in Isolation
    • Measuring "Stressed VaR" and Stress Testing Market Risk
  • Overview of Advanced Methods for Estimating Volatility and Correlation
    • Using GARCH Modelling to Forecast Volatility
  • Measuring “Tail Risk”
    • Extreme Value Theory
    • Expected Shortfall
  • Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Quantitative Techniques for Risk Measurement and Management (Continued)

  • Overview of Quantitative Models for Measuring Credit Risk
    • Structural Models
    • Default Intensity Models
    • Rating Migration Models
    • Stress Testing Credit Risk
  • Measuring "Hybrid" Market and Credit Risk
    • The Importance of using "Risk Neutral" Measures
    • VaR due to Stread Changes
    • CVA and CVA Risk
  • Methods for Measuring and Managing Liquidity Risk
    • Liquidity Ratios, Liquidity Curves and Liquidity-at-Risk
    • Stress Testing Exposures to Liquidity Risk
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Risk Management Strategies and their Practical Implementation

  • Regulatory Requirements for Risk Management in:
    • Banks
    • Insurance Companies and Pension Funds
  • The Risk Management Process
  • Hedging Financial Risk – Practical Examples
    • Hedging Interest Rate Risk with Futures, FRAs, Swaps and Options
    • Hedging Equity Risk with Futures and Options
    • Hedging Currency Risk
    • Hedging Credit Risk with Credit Derivatives
    • Hedging Sovereign Risk
  • Special Risk Management Strategies
    • Immunization and Factor Immunization
    • Dynamic Hedging (Portfolio Insurance)
  • Practical Considerations in Risk Management
    • Procedures, Controls and Reporting Requirements
    • Hedge Accounting
  • Outlook: Regulatory Changes and their Possible Impacts on Financial Risk Management
    • Basel III/CRD IV, Solvency II
    • EMIR and Dodd-Frank

Evaluation and Termination of the Seminar