Mastering Model Risk and Stress Testing Training Course

This intensive and highly practical programme will give you a thorough grounding in the methodologies behind stress testing.  In addition, you will run through a variety of scenarios enabling you to gain the tools and techniques needed to create, analyse and fully understand a wide range of model risk and stress testing models.  Attend this unique programme to stay ahead of your game and guarantee that you are prepared for the future whatever it may hold.

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The Black Scholes Model

• Assumptions behind the Generalized Brownian Motion (GBM)
  - Different implementations of Black Scholes (e.g. closed form solutions; trees; numerical quadrature; differential equations; Monte Carlo techniques and variance reduction methods)
• The advantages and disadvantages of the various methods
   

Excel Workshop: Using the various methods

Coping with Complicated Distributions

• Mean reversion
• Jumps and spikes
   

Case Study: Energy derivatives

Excel Workshop: Extending the Monte Carlo model to handle more complex distributions

Options and Leverage

• Call and put options
• Behaviour of options before expiration and at expiration
• Double and triple ETF's – an alternative to options?
• Assessing the riskiness of option positions
   

Workshop: Actual vs. log return and the leveraged ETF's

Market Risk Management

• The Greeks: Delta, Gamma, Vega, Theta, Rho etc.
• The idea of VaR
• The various VaR methodologies
• Model risk in VaR calculation
• Criticism of VaR
   

Workshop: Calculating the Greeks

Workshop: VaR spreadsheet and use it to calculate risks of several portfolios

Stress Testing and Scenario Analysis

• Stress Testing and scenario analysis
• The FSA "stress testing" letter
• The concept of "severe" and "plausible"
• Which scenarios should you choose
• How to design effective stress tests
• Bank stress tests in the US and Europe
   

Case Study: Examples of stress tests and scenario analysis

Discussion: "The rise of the humans"

The Mark to Market Paradigm

• Understanding the mark to market paradigm
• How Enron abused the "MtM"
• Level 1, Level 2 and Level 3 assets
   

Case Study: Banks use and "misuse" of these levels in 2008-9

CDS and the Copula Method

• Credit Default Swaps
• The Copula Method
• Gaussian Copula
• Other Copulas
   

Excel Workshop: The Gaussian Copula

Discussion: Is the Copula model partially to blame for the credit crunch?

Credit Risk Systems

• Credit Risk
• Exposure at Default (EAD), Probability of Default (PD) and Loss Given Default (LGD)
• The major challenges of designing a credit risk system
• The types of Credit Risk Systems
• Input and output parameters
   

Excel Workshop: Delegates will use the CreditRisk+ to analyze risks in various portfolios. Outline of original research by John Hull, Alan White and the speaker on Merton's model, equity volatility skews and credit risk.

Regulation and Credit Risk

• The implications of Basel II for credit risk management
• Basel II approaches: Standardized, F-IRB,A-IRB
• Which approach is "best"
   

Case Study: Examples of capital requirements under various Basel II methods

Discussion: FDIC is looking for alternatives to credit rating agencies

Discussion: Basel III

Counterparty Risk of OTC Derivatives

• Reserve models
• Credit value adjustment
• Bilateral debt value adjustment
   

Workshop: Spreadsheet to calculate DVA for an interest rate swap

Discussion: The "Dodd-Frank" Wall Street Reform

Exotic Options

• Asian options
• Cliquet options
• Binary options
• Barrier options
   

Case Study: Differentiating between "dangerous" versus "benign" exotics

More Sophisticated Volatility Models

• The implied volatility surface
• Introducing models with varying volatility (e.g. the Heston model)
• What do volatility models tell us about market risk?
   

Review:  Emanuel Derman's papers on Volatility

More Complex Derivatives

• A review of the derivative landscape
• What will the future hold?
   

Case study: Model Risk at Goldman Sachs

Over two highly practical days you will:

• Gain an detailed insight into why market risk models have performed sobadly in recent times – and what can be done to improve them
• Learn what a pricing model does and doesn’t tell you and how to dealwith the inherent risks in using one
• Understand the latest regulatory requirements for market, credit andoperational risk stress testing
• Learn best practice approaches for dealing with valuation risk
• Benefit from working on detailed case studies on theuse of stress testing to reveal portfolio sensitivities
• Gain a practical analysis of the lessons learnt in light of the credit crisis