The IFF School of Risk Management

Risk Management has never faced tougher scenarios than the events we have seen in recent years.  As a result, risk managers the world over have been investing heavily in improving their practical skills in order to cope with the effects of the global crunch.

Covering all aspects of risk management, including the challenges that the credit crunch has thrown up, this course will have a profound impact on your performance in the market and your career as a whole.

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Day 1

Introduction

Types of Risk and their Importance

• Credit risk
• Liquidity risk
• Market risk
• Systemic risk

Quantitative Risk Management

• Duration measures
• PV01
• Statistics for management
• The significance of value-at-risk

The Importance of Regulation

• The evolution of Basel "rules"
• Regulation by / within the EU

Regulation

The Evolution of the International 'Rules' For Bank Capital Adequacy Assessment

• The background to Basel I
• The Basel I rules for credit risk and market risk
• The problems with Basel I
• The aims and objectives of Basel II: the 3 'Pillars'
• The evolution of the Basel II [Pillar 1] rules for credit and operational risk
• The problems with Basel II
• The alternatives to Basel II
• The proposed changes to Basel II in the light of the global banking crisis and credit crunch

Workshop - Covering market risk-based capital requirements under the standardised measurement methods

Implementation of the Basel Capital Accord in Europe

• The implementation of Basel I's credit risk rules
  - differences between EU and Basel Committee approaches
• The implementation of Basel I's market risk rules
  - differences between EU and Basel Committee approaches
• The implementation of Basel II

Day 2

Market Risk

Market Risk – an Overview

• Market factors: the main source of market risk
• Marking to market with pricing models

Factor Sensitivity Analysis for Measuring Market Risk

• Calculating factor sensitivities for
  - foreign exchange
  - bonds
  - swaps
  - options

Workshop: Calculation of factor sensitivities - Example of managing a swap portfolio using factor sensitivities

Monte Carlo Simulation

• Overview of Monte Carlo technique
• Choleski decomposition

Workshop: Performing Choleski decomposition

Market Vaue-at-Risk

• Factor sensitivity limits
• VaR using variance/covariance method
• VaR using historic simulation
• VaR using Monte Carlo simulation 

Workshop: Value-at-risk estimation for a simple portfolio - Value-at-Risk limits - Specific risk for equity and debt instruments

Additional Risk Measurement Methods

• Extreme Value Theory (EVT)
• Conditional VaR

Worshop: Conditional VaR

• Component VaR

Workshop: Component VaR

• Stress testing
• Other controls and limits

Economic and Regulatory Capital For Market Risk

• Capital based on VaR methodologies
• Back-testing under Basel

Managing Market Risk

• Changing VaR
• Linear hedges
• Nonlinear hedges

Day 3

Credit risk is at the heart of all lending and the recent catastrophic events in financial markets have highlighted the problems of a massively dislocated credit market. In this section we will examine the role of lending and securitization of that lending in the so called "Credit Crunch" which has its origins in the sub-prime lending markets of the USA and the subsequent securitization process into the so call "toxic waste" of the CDOs.

Credit Risk

Introduction to Credit Risk

• Basic concepts of default on payments
• Settlement risk and pre-settlement risk
• The market drivers of credit risk
• Measurement of credit risk
• Comparing credit with market risk
• Concepts of joint default probability, loss given default and recovery rate
• Diversification and portfolio effects

Default Risk from a Historical / Actuarial Perspective

• Definition of credit events
• Credit ratings
• Basel II internal ratings based methods
• Historical default rates
• Marginal and cumulative defaults
• Transition probabilities
• Recovery rates
• Sovereign vs corporate debt

Default Risk from Market Prices of Securities

• Bond prices, spreads, liquidity and risk premium
• Equity prices
• Merton's model

Credit Risk Exposure

• Exposure by risk type, expected loss, worse loss
• Interest rate swaps, options
• Effects of margining and marking to market
• Limits and risk monitoring

Credit Derivatives

• Fundamental drivers behind the products
• Credit default swaps
• Credit linked notes
• Documentation issues
• Pricing and hedging examples

Case Study: "What caused the Credit Crunch?"

Day 4

Credit Risk

Credit Risk Management

• Estimating the distribution of credit losses
• Expected loss and unexpected loss, relationship with economic and regulatory capital
• Basel II credit risk capital
• Time effects
• Estimating the credit Value-at-Risk
• Introduction to portfolio credit models
• Management of credit risk

Workshop: Hands-on calculation of sample credit risk exposures and the theoretical pricing of a credit linked note

Looking Beyond Credit and Market Risk

Risk, Capital and Management

• What is all this measurement of risk for?
• Risk measurement vs. risk management
• The other uses of risk data
  – performance measurement and optimisation
  – Risk Adjusted Return On Capital (RAROC)
• Management perspectives on capital allocation and types
• Capital, its uses and alternatives
  – hybrids, hedging and insurance
  – tiers 1, 2 and 3

Other Risk Types

• Basel and the evolution of risk assessment
• Basel definitions of risk types and classifications
  – operational risk
  – liquidity risk
  – reputational, strategic and other risks
• Importance of operation risk
  – examples of or events
  – basel principles and definitions
  – menu approach for measurement
  ~ basic indicator
  ~ standardised approach
  ~ Advanced Measurement Approach (AMA)
  – the difficulties of quantifying Operational Risk

Operational Risk

• Review of basic quantification methodologies
  – scorecards
  – loss distributions
  – internal model
  – internal and external loss databases
  – scenarios
  – frequency vs. severity
  – Key Risk Indicators (KRIs)
• The problems of tail estimation with poor data
  – the uses of EVT for tail estimation
  – can OR really be modelled?
• Basel principles and OR management – how does your structure and process compare?
• Practical management of OR
  – process analysis and re-engineering
• Basel criteria and minima for OR capital

Case Studies: OR events and classifications

Asset and Liability Valuation

• The role of valuation
• The impact of model values on risk assessment
• FAS 157 and its classification of valuation types
• How models can mislead
• What is model risk?

Liquidity Risk

• Why is liquidity risk so pervasive?
• The role of LR in the credit crunch
• Solvency vs. liquidity
• Funding liquidity vs. asset liquidity
• The bank balance sheet
• Funding profiles
• Liquidity gap analysis
• Measuring liquidity risk
  – liquidity adjusted risk measurement
• What is Basel doing about LR?

Case Study: Liquidity Risk and the Credit Crunch – Lehman and the rest

The Future of Risk

• What lessons have we learnt about risk in the last twenty years?
• What will the new Basel Accord look like?
• A look at some of the current changes proposed including leverage limits and stressed VaR.
• Summary and final Q&A

Five reasons why you must attend this course:

1. You will get to grips with the practicalities of cutting-edge risk management methodologies
2. The residential structure allows the inclusion of highly focused case-studies with a deep emphasis on practical applications
3. It is the only programme of its kind, providing a comprehensive coverage of the tools, techniques and strategies used within market, credit and operational risk
4. Taught by the world’s leading risk management experts, it will provide you with the chance to learn from some of the best minds in the business
5. It will provide you with the perfect synergy between theory and real-world application, ensuring you make the transition from theory to practice, with outstanding success