Fundamentals of Risk Management

INTRODUCTION TO RISK MANAGEMENT

Risk classification

• Risk and risk factors
• Standard risks and “new” risks

Organisation of risk management

• Internal processes and operational aspects
• Basel: regulatory constraints
• Economic capital and regulatory capital

MARKET RISKS

Introduction

• Market risk factors
• Concept of Mark-to-Market
• Linear/non-linear exposure
• Sensitivities of the main market products.

• Practical workshop

• Quantify the risk exposure of a market portfolio (sensitivities)

Value-at-Risk

• Notion of expected losses (probability)
• Parametric VaR

• Practical workshop

• Calculate and analyse the parametric VaR for various market products

Market VaR

Fundamentals of stochastics

• Historical VaR and Monte Carlo
• Comparative analysis of the 3 methods
• Limitations and alternatives
• Back-testing and stress scenario
• Regulatory framework

• Practical workshop

• Calculate and analyse various historical VaR for various market products
• Further analysis (P&L vectors, ETl etc.)

Regulatory constraints

• Capital allocation for market risks
• Incremental Risk Charge

Counterparty risk

• Basic techniques and operational aspects
• Classification of the various counterparty risks
• Measuring counterparty risk: centile and average exposure
• Integration in economic capital
• Regulatory framework

• Practical workshop

• Analyse various risk profiles
• Lessons learned from the financial crisis in terms of market risk management

CREDIT RISK

Single risk

• Definition of credit risk
• Credit event / default, definitions
• Recovery rate
• Rating
• Credit risk and associated risks
• Hedging credit risk with CDS
• Dynamics of rating, credit spreads and CDS

Credit risk of a portfolio

• Notion of default correlation (historical/implied)
• Hedging techniques

• Practical studies:

• Analysis and management of the credit risk of a portfolio

Credit granting, ROE and RAROC

• Definition of ROE and RAROC
• Sensitivity of RAROC to risk mitigation techniques
• Ex ante and ex post management via ROE and RAROC

• Practical workshop

• Various RAROC calculations

From Basel II to Basel III

• Standard and internal methods (IRB)
• Internal rating models
• Basel ratios: EAD, PD, LGD, M, etc.
• Risk mitigation
• Capital allocation
• Impacts of the reform
• Consequences and lessons from the subprime crisis

• Practical workshop

• Comparative analysis of statutory capital allocation methods

OPERATIONAL RISKS

Fundamentals

• Definition and basic notions
• Classification of operational risks
• Frontiers in risk
• Capital allocation methods

Managing and monitoring operational risk

• Management objectives
• Key phases of operational risk management
• Organisation and systems

Operational risk management process

• Qualitative analysis
• Process identification
• Mapping of risks and associated controls
• Quantitative analysis
• Management and monitoring of operational risk

Conclusion

• The challenges of global risk management
• Recent developments in terms of best practice and regulation